Shares of Community Health Systems, Inc. CYH have lost 16.4% in the past six months, underperforming the industry’s decline of 3.8% due to several challenges being faced by the hospital industry. Peers like Acadia Healthcare Company, Inc. ACHC and Tenet Healthcare Corporation THC have moved down 32.8% and 2.6%, respectively, during this time.

Meanwhile, the S&P 500 index has experienced growth of 6.3%, highlighting the stark difference in performance. CYH has moved up 23.5% at this point from its 52-week low of $2.51. The stock is currently trading below its 50-day and 200-day moving averages, signaling potential downward momentum.

CYH 6-Month Price Performance Comparison

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Given this performance so far, can investors still consider holding on to Community Health stock, or should they steer clear of this stock? Let us delve deeper.

What's Weighing on CYH Stock?

The hospital sector is facing significant pressures, with analysts cautioning that the current administration's emphasis on reducing government expenditure and implementing policy changes could lead to lower profitability for hospitals in the near future. Uncertainties stemming from potential reductions in hospital funding and the expiration of insurance subsidies are compounding the challenges for the industry.

Community Health is experiencing a decline in patient volumes, which is impacting its revenues. In 2023, patient days decreased 4.6% year over year, and this downward trend continued with a 3.3% decline in the first nine months of 2024. By the end of 2024, the total drop is projected to be 5%, signaling a persistent challenge for the company.

CYH’s financial position is concerning, with its net debt accounting for 116% of its capital, significantly higher than the industry average of 84.7%. Its times interest earned ratio of 0.82X is well below the industry average of 4.83X. As of Sept. 30, 2024, Community Health had only $33 million in cash and cash equivalents, while its long-term debt stood at a staggering $11.5 billion, highlighting its limited financial flexibility.

A planned $120-million divestiture involving three hospitals in Pennsylvania was canceled after the buyer, WoodBridge Healthcare, failed to secure the necessary financing. This setback jeopardizes Community Health’s broader goal of achieving $1 billion in divestitures this year, potentially hindering its efforts to streamline operations and improve liquidity. However, CYH agreed in December 2024 to divest the Lake Norman Regional Medical Center, along with related businesses, to Duke Health. The deal is valued at around $280 million.

CYH’s Valuation

The company is currently trading at 0.03X forward 12-month price to sales, below its five-year median of 0.05X and the industry average of 0.73X. This indicates that the stock may be undervalued, possibly signaling cautious investor sentiment or concerns about its short-term outlook.

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CYH’s peers like Acadia Healthcare and Tenet Healthcare are valued at 1.21X and 0.58X forward 12-month price to sales, respectively.

CYH’s Earnings Estimates Move Down

Reflecting the negative sentiment around Community Health, the Zacks Consensus Estimate for loss per share has seen downward revisions. The consensus estimate for the current-year adjusted loss for CYH is currently pegged at 56 cents per share, indicating 59.7% year-over-year growth. The consensus mark for next year’s loss suggests an 82.1% improvement.

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Conclusion

Declining patient volumes, the potential of reduced government spending and significant leverage are concerning for the CYH stock. Despite a low valuation and strategic divestitures, downward earnings revisions and underperformance compared with peers and the market signal continued struggles. Given these factors, CYH’s risks outweigh its potential.

Given its Zacks Rank #4 (Sell), the stock appears to be a risky investment at present, and investors should get rid of it now.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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