UPDATE: UBS Downgrades Quorum Health (QHC) to Sell
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(Updated - August 11, 2016 8:38 AM EDT)
UBS downgraded Quorum Health (NYSE: QHC) from Neutral to Sell with a price target of $5.50. The downgrade follows disappointing Q2 results and guidance. Analyst A.J. Rice noted soft earnings power.
"The shortfall was across the board as both revs and margins were below UBSe. Ten underperforming hospitals (which QHC has identified as part of its divestiture plan) dragged the company's EBITDA in the quarter by $10 mln. QHC has LOIs on a certain number of these hospitals, which represented 50% of the $10 mln quarterly EBITDA drag. The company hopes to close on the sales of the hospitals with these first LOIs by the end of 2016. Our updated EBITDA estimates now reflect the company's updated 2016 outlook, a 5% Y/Y core growth in 2017, and a $15-$20 mln EBITDA tailwind from the sale of some of the underperforming facilities. QHC was spun off from its former parent earlier this year. Since that time, QHC management has said it was reviewing its portfolio and earnings trajectory. The company's 2Q results suggest the earnings power is lower ($70-90 mln below initial expectations) and the need for portfolio rationalization is greater than originally believed. Meanwhile, QHC has debt of roughly 5.6x projected EBITDA on our updated estimates," said Rice.
Discussing valuation, the analyst said, "Our updated PT of $5.50 (from $14) assumes QHC trades at 6.5x our 2017 EBITDA est (vs 6.0-6.5x prev). We believe a valuation discount for QHC relative to the hospital company average of 6.9x is warranted as a positive turn in operating momentum as well as portfolio rationalization will take time to materialize."
Shares of Quorum Health closed at $10.02 yesterday.
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