Healthcare Facilities
INITIATION
Initiating Coverage at Underweight; the More
Things Change . . .
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Challenges remain. We are initiating coverage of the hospital sector with a
Underweight stance. With inpatient demand still under pressure,
unpredictable bad debt and now healthcare reform on the horizon, we find
little reason for either EPS acceleration or multiple expansion.
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Deal flow reaching an end. With the TRI/CYH deal now complete, we believe
that the positive M&A/consolidation cycle that has accompanied the sluggish
operating environment is nearing an end.
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Politics to matter more. Over the next two to three years, the topic of
healthcare reform is likely to remain prominent with policymakers and the
public at large. As such, we expect topics such as economic fairness, price
controls, and the uninsured to remain in the headlines for some time to come.
It is difficult to envision P/E expansion in this type of environment.
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Stock recommendations. On the individual stocks, we offer the following
conclusions:
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Community Health Systems. We believe that CYH represents the best
investment vehicle in the space. Our price target is $52 per share,
offering substantial upside potential from current levels. We are initiating
coverage with an Outperform.
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Universal Health Services: With an enviable track record, a solid
geographic footprint and a diversified revenue base, UHS remains one
of the best positioned names in the space. With the stock down
considerably, we find the valuation attractive. We are initiating coverage
with an Outperform and a price target of $60.
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Health Management Associates, Tenet Healthcare: We are initiating
coverage of both stocks with an Underperform rating. Although both
stocks are down sharply this year, the lack of visibility on the next two
years’ financial results demands, in our mind, a cautious forward P/E
assumption. We believe that both firms are in the midst of a protracted
secular decline, each increasingly reminiscent of a former skilled
nursing provider, Beverly Enterprises.
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LifePoint Hospitals: Clearly, the transition to a larger-tier hospital provider
has been anything but smooth. We expect the news flow from the company
in terms of financial results to oscillate somewhere between the sublime and
the ridiculous. Consequently, we are initiating coverage with a Neutral rating.

Table of Contents
Investment Outlook 3
Investment Risks 7
Why Bother? It Pays to Be Nimble 8
How to Invest in Hospitals: Very Carefully! 13
Key Themes 22
Basic Operating Dynamics 34
Another Approach to Health Dynamics 39
Community Health Systems, Inc. 44
Investment Thesis 45
Financial Analysis 46
Investment Risks 50
Valuation 51
Company Description 53
Universal Health Services 57
Investment Thesis 58
Financial Analysis 58
Investment Risks 60
Valuation 63
Company Description 65
LifePoint Hospitals 69
Investment Thesis 70
Financial Analysis 70
Investment Risks 75
Valuation 75
Company Description 78
Tenet Healthcare Corporation 82
Investment Thesis 83
Financial Analysis 84
Investment Risks 88
Valuation 89
Company Description 91
Health Management Associates, Inc. 95
Investment Thesis 96
Financial Analysis 98
Investment Risk 103
Valuation 106
Company Description 108