Triad Left in Lurch as CFO Walks
Melissa Davis
11/17/05 - 02:39 PM EST
Triad (TRI - Cramer's Take - Stockpickr) is licking its wounds after losing its highly regarded CFO, Burke Whitman, to competing hospital operator
Health Management Associates (HMA - Cramer's Take - Stockpickr).
Triad announced on Thursday that Whitman will leave the company this week to assume a higher-ranking position as president and chief operating officer of HMA. Previously, the Plano, Texas-based hospital chain -- along with its anxious investors -- had been hoping to welcome the military officer back from a tour of duty in Iraq instead.
The company missed Whitman while he was away, says Fulcrum analyst Sheryl Skolnick. During his recent absence, she notes, Triad saw its operating metrics deteriorate and often failed to explain exactly what was going on. Without him, she suggests, the company will now struggle to regain the credibility it has already lost.
"It is our view that confidence in the remaining management of Triad has been shaken, and that one of the major factors keeping the stock price from further deterioration was the hope that 'Burke's back,'" Skolnick wrote on Thursday. "Well, he's back from Iraq -- but he's not at Triad."
Skolnick switched her ratings on Triad and HMA after hearing the latest news. She now has a sell rating on the first stock and a neutral rating on the second.
The stocks reacted accordingly. Triad tumbled 4.2% to $41.36, while HMA jumped 5.7% to $22.76 on the company's big catch.
Whitman's Waltz
Lehman Brothers analyst Adam Feinstein quickly embraced Whitman's move as a "major positive" for Naples, Fla.-based HMA.
For starters, Feinstein says, Whitman will be filling an important COO slot that has been left vacant at HMA for years. Moreover, he says, Whitman will be arriving after a particularly tough year for HMA and could bring some fresh ideas to the "conservatively managed" company. Finally, he adds, Whitman could ultimately go on to become the company's next CEO.
Thus, Feinstein believes that Whitman is simply pursuing attractive opportunities with a new employer rather than running away from problems at an old one. But Skolnick, for one, is not so sure.
"We ... are concerned that something more than just the weather in Naples, Fla., and the shift in responsibility to COO from CFO is behind this move," Skolnick wrote. "In our view, it is never, ever a good thing when a CFO leaves."
Still, Skolnick worries about the company that has snagged Triad's former CFO as well.
"We remain very concerned about what (Whitman) will find once he gets to HMA and begins to explore the company's operations and financial reporting practices," she wrote. "Investors/owners of HMA shares must understand that guidance could change materially after Burke settles in at HMA."
Skolnick believes that HMA has established "very aggressive" targets that, in the end, will still result in poor earnings quality going forward. She specifically questions how HMA expects to increase same-hospital admissions by 2% to 4% when the industry -- at its best -- has been posting growth rates that are merely half that size.
In the Dark
Ultimately, Skolnick wonders if HMA really understands certain aspects of its business at all. For example, she says that HMA "didn't know" until recently how much revenue it receives from stop-loss payments -- checks from insurance companies that resemble Medicare outliers -- even though
Tenet (THC - Cramer's Take - Stockpickr), with its infamous billing strategy, had brought the topic to the forefront.
Moreover, Skolnick points out, HMA has wound up in the dark when it comes to the crucial issue of bad debts from the uninsured as well.
"A couple of years ago, HMA management said something to the effect that 'Our bad debt ratio can be 6% when the rest of the industry is at 9% or higher because we're in these local markets and see our patients in the supermarket. We know these people, and they'd be too embarrassed not to pay their bills,'" Skolnick recalls. "Guess the uninsured don't buy groceries anymore because they sure aren't paying their hospital bills."
During the latest quarter alone, she notes, HMA saw its charity care -- provided to patients who are unable to pay -- jump a "whopping" 24%. Notably, she adds, charity write-offs are now climbing at a faster rate than gross revenue itself.
Thus, Skolnick remains worried about HMA despite her upgrade of the company. She raised her rating on the stock because of Whitman's arrival, but she doubts even he can be some kind of "miracle worker."
In the meantime, however, the popular executive has already managed to stir up some fresh hope about the company.
"We don't expect the operational issues to be resolved overnight," conceded Feinstein, who has an equal-weight rating on the company's stock. "But (Whitman's) appointment should provide a catalyst for improving operations in the future."
