Community Health Calls at Five-Year High on Medicare: Options
Community Health Systems Inc. (CYH) options traders are the most bullish in five years, convinced shares already reflect the impact of Medicare cuts on the second- largest U.S. hospital owner.
Calls to buy shares of the Franklin, Tennessee-based company outnumber puts to sell by more than 5-to-1, and last month the ratio soared to 9.5, the highest since March 2006, according to data compiled by Bloomberg. The hospital operator trades for a record low 5.1 times earnings from the past year, less than half the valuation for the Standard & Poor’s 500 Index, after the shares fell 61 percent since March through yesterday.
The U.S. congressional supercommittee formed to reduce the budget must decide on spending reductions by Nov. 23, or else automatic cuts will take effect. Those would include a 2 percent decrease in Medicare, which pays hospital owners such as Community Health.
“The Medicare reimbursement cuts that are being priced in to Community Health’s valuation appear unrealistic,” Sam Goodyear, an analyst at New York-based CreditSights Inc., said in a telephone interview yesterday. “The valuations are attractive,” he said. “They’re way oversold.”
Tomi Galin, a spokeswoman for Community Health, declined to comment, saying the company is in a “quiet period.”
The stock climbed 0.4 percent to $16.50 as of 9:35 a.m. in New York.
President Barack Obama has proposed a $248 billion cut to Medicare as part of a $1.5 trillion reduction of the U.S. deficit. If the supercommittee, composed of six Democrats and six Republicans, misses the Nov. 23 deadline, the federal government will automatically reduce Medicare spending, which is likely to lower reimbursements to hospitals.
A.J. Rice, a New York-based analyst at Susquehanna Financial LLLP in New York, said Community Health would benefit most should investors assign higher valuations to stocks in the industry following the budget decision by Congress. A 1 point increase in the ratio between enterprise value and earnings before interest, taxes, depreciation and amortization would drive Community Health up about 135 percent, Rice said in an e- mail yesterday.
Five of the six Community Health options with the greatest ownership, or open interest, are calls expiring about a month after the supercommittee’s deadline. They include December $34 calls, which are priced 107 percent above the stock price.
Community Health’s rivals have lower call-to-put ratios, signaling less optimism. For Tenet, the third-largest U.S. hospital operator, the figure is 1.87-to-1, down from 3.83 in March. At HCA, the nation’s biggest hospital chain, it’s 1.59.
“Now seems like a pretty good time to bet on a return to outperformance” for Community Health, Michael A. Gayed, chief investment strategist at Pension Partners LLC in New York, said in an e-mail yesterday. His firm oversees about $140 million. “Bullish wagers in the options market are sensing that the multiyear weakness in the stock is about to reverse,” he said.
Community Health has slumped the most among 38 peers in the S&P MidCap 400 Index this year. The company faces a federal investigation spurred by an April lawsuit by Tenet, which accused the company of overcharging Medicare at least $280 million. Tenet filed the lawsuit to help block Community Health’s unsolicited takeover offer. Regulators probably won’t finish the probe until sometime next year, said Art Henderson, an analyst at Jefferies & Co in Nashville, Tennessee.
“That kind of settlement could translate into a fine of hundreds of millions for a company like Community Health if the investigation finds something,” he said in a phone interview. Henderson has a “hold” rating and $27 share-price estimate.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped a record 160 percent during the third quarter as concern grew the global economy was slowing and the sovereign debt crisis in Europe was worsening. The volatility gauge fell 0.6 percent to 35.68 today. In Europe, the VStoxx Index, which measures the cost of protecting against Euro Stoxx 50 Index losses, dropped 5.9 percent to 40.10.
Investors shouldn’t grow complacent about the degree reimbursements may drop should Medicare’s budget be reduced, said Les Funtleyder, a money manager and health-care strategist at Miller Tabak & Co. in New York.
“If they’re serious about deficit reduction, hospitals are the most exposed of any industry group if their reimbursements get cut proportionally,” he said in a phone interview yesterday.
Community Health puts priced 10 percent below the stock price cost 1.09 times more than calls to buy the shares, according to data compiled by Bloomberg. That’s near the six- month low of 1.06 set on Sept. 26, indicating investors aren’t paying up for protection from losses. The options with the biggest open interest are December $29 calls, priced 76 percent above the stock, and December $34 calls.
“When you see these options bets being made, sometimes it’s a good indicator that you’d see a reversal,” Walter Todd, who helps manage about $950 million at Greenwood Capital in Greenwood, South Carolina, said in a telephone interview yesterday. “It’s not going to stay that extended on the downside forever.”
Bloomberg moderates all comments. Comments that are abusive or off-topic will not be posted to the site. Excessively long comments may be moderated as well. Bloomberg cannot facilitate requests to remove comments or explain individual moderation decisions.