The Market Doesn't Like What It Sees From Community Health Systems, Inc.'s (NYSE:CYH) Earnings Yet As Shares Tumble 28%

The Community Health Systems, Inc. (NYSE:CYH) share price has fared very poorly over the last month, falling by a substantial 28%. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 12%.

After such a large drop in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 16x, you may consider Community Health Systems as a highly attractive investment with its 5.3x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Community Health Systems' earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Community Health Systems

Want the full picture on analyst estimates for the company? Then our free report on Community Health Systems will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Community Health Systems would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 59%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 7.6% per year over the next three years. That's shaping up to be materially lower than the 11% per year growth forecast for the broader market.

With this information, we can see why Community Health Systems is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Community Health Systems' P/E looks about as weak as its stock price lately. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Community Health Systems maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 5 warning signs for Community Health Systems (2 shouldn't be ignored) you should be aware of.

You might be able to find a better investment than Community Health Systems. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.