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Appaloosa Management starts new positions 3Q 2013

Part 3
Appaloosa Management starts new positions 3Q 2013 (Part 3 of 6)

Appaloosa Management starts new positions in FCX, INGR, CYH, THC and sells MSFT, CMCSA—13F Flash C

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Appaloosa Management is a hedge fund founded in 1993 by David Tepper and Jack Walton. It’s based in Short Hills, New Jersey. Appaloosa Management invests in public equity and fixed-income markets around the world. It has about $20 billion in assets under management.

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

In this six-part series, we’ll go through some of the main positions Appaloosa Management traded this past quarter.

Appaloosa started new positions in Freeport-McMoRan Copper & Gold (FCX), Ingredion Inc. (INGR), Community Health Systems Inc. (CYH), and Tenet Healthcare Corp. (THC) and it sold Comcast Corp. (CMCSA) and Microsoft (MSFT).

Why buy Community Health Systems Inc. (CYH)?

Community Health Systems (CHS) reported $0.72 EPS for the quarter, beating analyst estimates, but revenue of $3.22 billion for the quarter was below the consensus estimate. It said the operating environment remains very challenging for healthcare providers. Its net operating revenues improved slightly over the prior year period on both consolidated and same-store bases—despite ongoing volume weaknesses. The company has also realized a benefit of its cost management initiatives and remains focused on driving operating efficiencies across its hospital system.

Its merger agreement with Health Management Associates (HMA) remains on track. Under the terms of the transaction that was announced in July 2013, HMA will be acquired by CHS for approximately $7.6 billion, including the assumption of outstanding indebtedness. CHS said that it’s in takeover discussions with Metro Health Hospital, Sharon Regional Health System, and Akron General Health System. These three potential acquisitions represent over $1 billion in additional revenue.

CHS said some Electronic Health Record  (EHR) conversions affected its volume in the third quarter, but that should improve the per-share amount in 2014. Another positive is that it’s expanding coverage, but the benefit won’t be realized until 2016.

The company is currently in negotiations with the Department of Justice about resolving its claims in connection with the Department’s investigation into the company’s short-stay hospital admissions for the years 2005 to 2010, as well as its investigation at its hospital in Laredo, Texas. Based on those negotiations, which aren’t final, the company believes that a reserve of $98 million, or $0.65 per share (diluted), is sufficient to cover these claims and expenses.

The company recognized approximately $65.0 million for 3Q 2013 of incentive reimbursement for Health Information Technology for Economic and Clinical Health Act (HITECH) incentives from Medicare and Medicaid related to some of its hospitals and for some of its employed physicians who have shown meaningful use of certified EHR technology or completed attestations to their adoption or implementation of certified EHR technology. The company received cash related to the incentive reimbursement for HITECH of approximately $22.6 million.

Based on its 3Q 2013 financial performance, the company is updating the EPS guidance for 2013 to a range of $2.85 to $3.10. The stock is up 32% year-to-date.

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Appaloosa invests in the global public equity and fixed income markets with a focus on equities and debt of distressed companies, bonds, exchange warrants, options, futures, notes, and junk bonds. According to Bloomberg Businessweek, the firm’s client base consists of high–net worth individuals, pension and profit sharing plans, corporations, foreign governments, foundations, universities, and other organizations. Investors commit to a locked period of three years during which their withdrawals are limited to 25% of their total investment.

Appaloosa founder David Tepper’s investment specialty is distressed companies. While most hedge funds underperformed the U.S. stock market in 2012, Tepper’s flagship hedge fund successfully bet on stocks and other securities at key moments in 2012, posting a net return of nearly 30%. In recent years, he’s become known as a philanthropist. His largest gift of $67 million went to Carnegie Mellon University in 2013, whose Tepper School of Business is named after him. He earned his BA in Economics from the University of Pittsburgh in 1978 and his MBA (then known as an MSIA) from Carnegie Mellon in 1982.

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