Analyst Says Sell Community Health After Excessive Rally

Research firm Piper Jaffray downgraded hospital operator Community Health Systems (CYH) to Underweight, its equivalent of a sell rating, from Neutral. The stock's rally has been excessive, as it now trades at the same valuation as a much more attractive hospital chain, HCA Holdings (HCA), the firm believes.

EXCESSIVE RALLY: Before today, Community Health's stock had rallied 56% over the last four weeks, noted Piper Jaffray analyst Sarah James. The rally is "overdone," she warned. As of yesterday after the close, Community Health was trading at roughly the same valuation, based on estimated 2018 EBITDA levels, as HCA, James noted. The analyst says that historically HCA's valuation has been two to four times higher than that of Community Health. That valuation gap is "more appropriate,"given Community Health's "strained balance sheet," high debt levels and its decision to divest "lower margin assets," shrinking its top line, James believes.

ASSET SALES HURT: Community Health's divestitures yielded proceeds of $1.8B, but will cut its revenue by $3B and lower its EBITDA by about $150M, James stated. Moreover, the company's debt levels still remain high and limit its ability to conduct beneficial M&A, James warned. Finally, the asset sales will limit Community Health's scale when it comes to purchasing supplies, causing its supply costs to rise further, James stated, adding that the company has already experienced this phenomenon.

PRICE TARGET: James lowered her price target on Community Health to $7 from $10.

PRICE ACTION: In morning trading, Community health fell 3.4% to $9.42, while HCA shares added 1% to $88.11.