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Shares of Health Management Associates (NYSE:HMA) traded with losses of up to 20% in Wednesday's trading session. On Tuesday after the market close, the operator of 70 hospitals throughout the United States, gave an update for the first quarter and the remainder of the year.

Preliminary Results For The First Quarter

Health Management now expects to generate revenues of approximately $1.48 billion for the first quarter of 2013, essentially unchanged from last year's first quarter revenue of $1.485 billion.

Revenues fell way short of analyst estimates, who on average expected the company to guide for first quarter revenues of $1.77 billion, as the seasonal uptick in business activity did not materialize.

The company expects to report adjusted EBITDA between $192 and $196 million, resulting in diluted earnings per share of between $0.08 and $0.09. This guidance includes a $0.04 per share charge in interest rate swap expenses. Adjusted earnings of $0.12-$0.13 per share, fell again short of consensus estimates of $0.24 per share.

The company attributes the poor results to a 5.7% decline in adjusted admissions. Actual admissions are expected to fall by 8.8%, due to a decrease in uninsured patient volumes.

Profitability was furthermore impacted as the allowance for doubtful accounts increased by 210 to 230 basis points. Total allowances for doubtful accounts are expected to increase between 14.0% and 14.2% of total revenues.

CEO Gary Newsome commented on the disappointing first quarter, "We believe that preliminary results for first quarter ended March 31, 2013 are a reflection of the difficult operating environment for inpatient services. In response, we have reduced our costs accordingly going forward, seasonal nursing labor contracts are expiring, and we will continue to closely manage our expenses relative to the volume and acuity of our patients."

Update For The Remainder Of The Year

As a result of the poor first quarter, and the implications for the remainder of the year, Health Management has negatively adjusted its outlook for the year.

At best full year admissions are expected to come in flat, while they could fall by as much as 3%. Net revenues are expected to come in between $6.8 and $7.0 billion, as the provision for doubtful accounts will increase to 14-15% of total revenues.

Consequently, income from continuing operations is expected to come in between $0.86 and $0.95 per share. This implies that the upside of the range has been lowered by six cents. This guidance excludes the negative $75-$85 million impact on interest rate swaps expenses.

Analysts were looking for full year revenues of $6.86 billion, on which Health Management was expected to earn $0.93 per share.

Valuation

Health Management ended its full year of 2012 with $180.3 million in cash, equivalents and short term investments. The company operates with $3.56 billion in short and long term debt, for a net debt position approaching $3.4 billion.

The company generated full year revenues of $6.75 billion, before the allowance of doubtful accounts. The company reported a net income of $164.3 million attributable to its shareholders, or $0.65 per diluted share.

Factoring in Wednesday's declines, the market values Health Management Associates at $2.7 billion. This values the company's equity at 0.4 times 2012's annual revenues and 16-17 times annual earnings.

Health Management Associates does not pay a dividend at the moment.

Some Historical Perspective

Long term shareholders in the operator of hospitals have been hit hard. Shares traded as high as $25 back in 2005 and have fallen to lows of just $1.5 in 2008 as demand for its services declines and the company suspended its dividend. A weak balance sheet, did not provide comfort either during those harsh times.

Shares steadily recovered to highs over $13 per share earlier this year. Despite Wednesday's 16% drop, shares are still trading with gains of 13% for the year of 2013.

Investment Thesis

Tuesday's warnings took investors by surprise. Health Management saw the conditions deteriorate into the quarter, but it did see some positive points in the first few days of April.

Revenues in the traditionally strong first quarter are expected to come in unchanged compared to the fourth quarter, and down 3% compared to the first quarter of last year. Note that revenues in the final quarter of 2012 were up almost 7% on the year before,and up almost 3% on the quarter before.

Note that while the full year outlook for 2013 came somewhat in line with analysts projections, it now includes the impact of the joint venture with Bayfront Health Systems, announced in February. The 80% stake in the company, which is based in Florida, is expected to add $225 to $250 million in annual revenues. Health Management paid some $162 million for the stake.

Management already gives up on 2013, calling the year a "transition" year. With average revenues per admission of $8,485 per client, the average cost per client for the average stay of 4.2 days comes down to little over $2,000 per day. As medicaid providers and corporations are increasing deductibles and shifting the risks to customers, demand is waning. Consumer spending continues to be under pressure as a result of the recent payroll tax hike.

Yet Health Management has already cut costs, targeting some $90 to $110 million in savings for the remainder of the year. The company furthermore points out that the long term prospects remain good with the healthcare reform approaching next year. The reform itself should boost revenues, as customers don't have to pay themselves. More importantly, it would automatically reduce the allowance for doubtful accounts.

I remain on the sidelines. The continued fiscal consolidation will most likely not result in healthcare reform "paradise" for healthcare providers like many investors think. While the legislation will boost revenue streams for healthcare providers, an increased focus on costs could limit profit growth.

Source: Health Management Associates - Poor First Quarter Already Makes 2013 A Transition Year