Earnings wrap: CHS, America Service

Hospital operator beats the Street, Michigan cost surprise stings ASGR

Email | Print By Erin Lawley and Geert De Lombaerde

Community Health Systems reported third-quarter financial results that topped expectations Wednesday and issued its tentative guidance for 2010.

Franklin-based Community Health Systems posted revenue of almost $3.1 billion in the three months ended Sept. 30, up 12.1 percent from the third quarter last year. Net income was $57.9 million, or 65 cents per share, compared to $50.4 million, or 53 cents per share, in Q3 2008. Analysts had expected earnings per share of 62 cents on revenues of $3.02 billion.

The earnings beat had CHS shares (Ticker: CYH) moving up after hours, recovering some of the almost 8 percent it lost during regular trading Wednesday. They closed the after-market session up 1.6 percent at $30.59 – still down more than 6 percent from their Wednesday open.

On the operations front, admissions rose more than 7 percent during the quarter while the pre-tax margin from continuing operations grew to 3.6 percent from 3.2 percent a year ago.

“We continued to benefit from a consistent performance at the hospital level, as evidenced by favorable revenue trends and same-store margin expansion,” said Wayne Smith, president and CEO, in a statement.

CHS increased same-store operating revenue by 5.4 percent last quarter. As of Sept. 30, the company owned 122 hospitals, seven more than it had at the same time last year.

Smith also reaffirmed the top end of his team’s 2009 earnings guidance and set a tentative 2010 guidance —factoring in two acquisitions — of $12.8 billion to $13.2 billion in revenue and income per share of $2.80 to $3. The midpoint of that EPS range is up 11 percent from this year’s expected number.

“This report should go a long way toward calming investors fears of the impact of the recession on hospitals and should remind people that flu is a spike, not a trend,” Pali Research analyst Sheryl Skolnick wrote in a note to investors. “It’s seasonal and clearly CYH’s facilities weren’t in that season yet.”

The third-quarter numbers at America Service Group were stung by what President and CEO Rich Hallworth called “the unexpected and very late receipt” of about $2.5 million in claims related to the company’s new Michigan contract. As a result, gross margins fell to 6.1 percent from 9.2 percent a year ago.

Net income more than doubled from last year’s third quarter – when the company spent $2.3 million on a restructuring plan — to $716,000. Revenues of almost $160 million topped analysts’ forecasts by about 1 percent and administrative expenses fell to 4.1 percent of revenue from 6.0 percent.

“We remain optimistic about our long-term performance in our Michigan contract and across our contract portfolio,” Hallworth said. “In addition, we are very pleased with our cash collections for the quarter in this tough economy.”

In addition to the Michigan hiccup, America Service also incurred almost $1 million in legal costs related to the investigation related to a 2006 shareholder lawsuit against its Secure Pharmacy Plus unit. The case entered mediation late last month and the company has recorded an $8 million reserve on its balance sheet.

America Service investors took the unexpected news in stride after hours Wednesday, pushing down the stock (Ticker: ASGR) by just 0.3 percent. They had lost more than 3 percent in regular trading, but are still 40 percent in 2009.