Analyst Breaks Down The Bear Thesis For Lifepoint, Community Health

The managed care sector provides investors with access to a "structurally advantaged" sector that's "uniquely well-positioned" to take advantage of the current "Goldilocks cyclical backdrop" -- but this logic doesn't apply to every single stock in the group.

The Analyst

Goldman Sachs' Stephen Tanaal initiated coverage Wednesday of LifePoint Health Inc LPNT's stock with a Sell rating and $45 price target. He also initiated coverage of Community Health Systems CYH with a Sell rating and $3 price target.

LifePoint Health

The case for selling LifePoint's stock is simple, Tanaal said in a note. LifePoint happens to be the sole company within the analyst's coverage that has a flattish population growth. But its bed-count weighted trailing five-year population compounded annual growth rate (CAGR) would yield a nominally negative number. The company's markets are the least populated among the hospitals and its bed-count weighted unemployment rate is notably below its peers. Also, relative to asset quality, LifePoint also has the "most volatile" EBITDA margins for the period from 2007 to 2016, the analyst also said.

Looking forward to 2018 and beyond the company faces growing unpaid bills which would further pressure its bad debt expense and profit margins.

Community Health

Among the entire sector, Community Health ranks last in terms of asset quality given its group-low EBITDA margin, a weak CROCI outlook with years of lean capital expenditures, Tanaal said in a separate note. On top of that, the Street's sentiment on Community Health is already negative but the analyst sees incremental downside to EBITDA in 2018 and 2019 as "evidence mounts that recent operational weakness relates more to secular rather than cyclical factors."

While the company will be able to pay down its debt through 2020, leverage will rise on declining EBITDA in 2018 before beginning to decline slowly, the analyst said. The company holds $3.5 billion of contractual debt maturities in 2018 and 2019 but under a worst case scenario it could see a total of $5.5 billion of debt come due between now and August 2019.

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