HMA Takes a Hammering
Melissa Davis
07/31/07 - 02:15 PM EDT
Investors have finally lost their patience and pulled the plug on
Health Management Associates (HMA Quote).
With their hopes for a long-awaited recovery dashed by a miserable second-quarter update, HMA investors on Tuesday dumped their stock -- sending it to lows unseen since 1999 -- in an effort to escape further pain. Wall Street experts, who once adored HMA's stock, started issuing downgrades that helped usher investors out the door.
CRT Capital Group analyst Sheryl Skolnick, already an outspoken critic of HMA, quickly cut her rating on the company's stock from fair value to sell despite its 20% plunge on Tuesday.
Following a huge bad-debt charge and reduction in full-year guidance, "HMA is finally coming in line with both the reality of its business and with its peers," Skolnick wrote. "It is ironic, therefore, that we are lowering our rating ... at this time. But it is, in our view, completely necessary."
Notably, Skolnick insisted, HMA continues to trade at "an astounding premium" that does not properly reflect the company's deteriorating operational performance.
Meanwhile, Deutsche Bank analyst Darren Lehrich stepped forward with a downgrade of his own. After raising his recommendation on HMA to buy just five months ago -- when he sensed chances for a turnaround -- Lehrich cut his rating back to hold and portrayed margin improvement at the company as "elusive."
Still, Lehrich stopped short of urging investors to sell the stock outright.
"On lower margins, HMA's ability to generate EPS (earnings-per-share) gains through balance-sheet de-leveraging is greatly diminished, thus making the equity no longer compelling on a near-term basis," wrote Lehrich, whose firm seeks to do business with the companies it covers. HMA's debt ratio "is now roughly six times its run rate, thus placing even greater importance on near-term asset sales and de-levering activity -- but not suggestive of any liquidity problems" right now.
Yet, as Skolnick pointed out, HMA has already tried to sell underperforming assets in a deal that ultimately fell through and hurt the company's recent results. Meanwhile, experts calculate, HMA has a cash balance of just $110 million -- with earnings on the decline -- and a huge long-term debt balance totaling some $3.7 billion.
To be fair, Bear Stearns analyst Jason Gurda highlighted HMA's cash flow as the one real strength in the company's otherwise dismal results. Notably, he pointed out, HMA's cash flow nearly doubled -- hitting $148 million -- from the weak levels seen one quarter ago.
Gurda has an outperform rating and a $13 price target on HMA's stock. However, his outlook on the company is currently under review. His firm makes a market in the company's securities.
Meanwhile, Skolnick has raised questions about even HMA's seemingly strong cash flow.
"As we examined the 2Q07 results, we noted extensive use of the balance sheet to create cash flow from operations -- something we have been very concerned about in the past," wrote Skolnick, whose firm also makes a market in HMA's securities. "The 'delta' of balance sheet items this year versus last year was a cash inflow of $62 million.
"As liabilities can be used to create cash flows ONLY in the short term, we deem the reported CFFO for 2Q07 of poor and unsustainable quality."
Skolnick has slashed her price target on HMA's stock to $7.20 in the meantime. Even after Tuesday's plunge, the stock still sits above that level at $8.32 a share.
Skolnick, for one, feels that HMA is finally getting the treatment that it deserves.
"We believe ... that HMA has now shown itself not to be immune from any of the industry's ills," she concluded in her downgrade. "There is nothing magic about HMA. Nor is there anything special that we can see relating to the company's turnaround plans."
