Sparks hospital sale seen as a positive for HMA

A recent report from Argus Research says the $138 million purchase of Sparks Health System reflects an improved balance sheet for Health Management Associates.

Naples, Fla.-based HMA signed a definitive agreement Nov. 4 to acquire Fort Smith-based Sparks Health System. The deal is expected to close Nov. 30, and HMA has already named Melody Trimble as the incoming CEO for Sparks.

HMA reported in a recent filing with the federal Securities and Exchange Commission the $138 million sale price will be paid with “a combination of cash on hand and borrowings under the Revolving Credit Agreement.”

New York-based Argus Research cited recent improvements to HMA’s balance sheet for upgrading HMA to a “Buy” from a “Hold” rating. Argus also placed a $10 per share price target on HMA. HMA shares (NYSE: HMA) closed Monday at $6.04.

“Our upgrade reflects our view that hospitals, among the various segments of the healthcare industry, will be the clearest beneficiaries of federal efforts to expand healthcare coverage,” Argus noted in its research report. “In addition, HMA is improving its operating metrics and strengthening its balance sheet. By several key metrics — profitability, admissions volume, physician recruitment and surgical volume — HMA has made significant strides over the past 12 months. Moreover, as demonstrated by the Sparks Health System transaction, it is now in a stronger position to acquire assets at attractive valuations that will help to drive future growth.”

However, Argus reminds that HMA is still a company with a heavy debt load.

“Our financial strength rating on HMA is Low, the lowest rung on our five-point scale. While the balance sheet is remains highly leveraged, the company has paid down debt. Debt now accounts for 87% of total capitalization, down from 93% a year ago. Cash flow from operations for the first nine months of 2009 was $357 million, compared to $376 million in the year-ago period. If profitability continues to improve, we believe these gains will translate to stronger cash flows,” Argus reported.

Argus said HMA is also focused on recruiting new physicians, with 475 added in the first nine months of 2009 and at least 600 new doctors recruited by the end of 2009. Recruiting physicians has proven a tough challenge for Sparks, St. Edward Regional Medical Center and other area health care companies.

“HMA hospitals face increased competition from physician-run centers that can perform many of the same procedures as hospitals. To counter this trend, HMA is aggressively recruiting new doctors who can attract more surgical activity. At the same time, the company is trying to increase its own outpatient activities, since this business carries lower overhead than inpatient procedures,” Argus noted.

Other notes from the Argus report include:
• “At this point, we are focusing on likely growth drivers for next year, and look for newly recruited physicians to generate growth in admissions and surgical referrals. We also expect HMA to make additional acquisitions over the next 18 months. Given today’s attractive asset prices, we expect these acquisitions to contribute relatively quickly to earnings.”

• “Hospital management companies such as HMA face pressure from health insurers seeking to lower annual increases in reimbursement rates, as well as higher costs stemming from the increased use of certain implantable and coronary devices.”

• “In addition to posting better operating metrics, HMA is positioning itself to drive future growth with help from acquisitions. It is also in a stronger position to recruit physicians. While it takes time for new doctors to attract additional patients, we think these recruitment efforts will have an impact in 2010. We also expect HMA to benefit from external factors, as Washington moves to expand the number of Americans with healthcare coverage.”