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Community Health Systems: Growth Shots

This hospital company steadily acquires non-urban facilities and improves their performance.

Small-town hospital operator Community Health Systems is growing strong. The Brentwood, Tenn., company owns the largest collection of non-urban hospitals, which it steadily expands by acquiring two to four facilities each year. In 2005, Community Health added five new hospitals, bringing its total to 71 in 21 states.

The company looks for acquisition candidates that are located at least 25 miles away from competing hospitals. More than 85% of Community Health's hospitals are the only ones in town. Once the company buys a hospital, it increases services and aggressively recruits doctors, reducing the need for patients to travel to larger cities for specialized care. "Acquisition growth continues to be impressive, demonstrating the success of [the company's] long-term strategy to roll up and turn around underperforming hospitals," says Thomas Weisel Partners analyst Eric Percher, who gives the stock (symbol CYH) an "outperform" rating.

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Revenues are growing steadily with acquisitions. In 2005, revenues reached $3.7 billion, up 17% from 2004. Community Health estimates 2006's top line at about $4.2 billion. Net income also increased in 2005, by 17%, to $190 million. Admissions rose 9%. "Although we retain a cautious view of the hospital group, we believe that [Community Health's] non-urban hospital portfolio, proven growth strategy, and experienced management will enable the company to outperform its peers," Percher says.

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Shares of the company, currently $38, trade at 17 times analysts' 2006 earnings estimates of $2.18 per share, according to Thomson First Call. Percher believes the stock is worth $40 to $45.

--Katy Marquardt

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