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LifePoint on Life Support

Updated from 10:45 a.m.

LifePoint (LPNT) has taken a definite turn for the worse.

Shares dropped 15% after the rural hospital operator said profits plunged in the second quarter. Weak admissions and rising expenses, including a spike in bad debts from the uninsured, have been hammering the company's operations. LifePoint also trimmed full-year guidance.

Second-quarter income fell some 61% to $13.4 million, as escalating costs in three different areas -- bad debts, labor costs and malpractice insurance -- took a heavy toll on the bottom line. Earnings per share from continuing operations came in at 43 cents, well short of the 61-cent consensus estimate. Revenue, while up 17% to $654 million, fell shy of Wall Street targets as well.

LifePoint's skyrocketing bad-debt expense seemed to worry analysts most. At 12.4% of revenue in the latest quarter -- up from 10.2% a year ago -- it sent the company's profit margins to their lowest level in recent memory.

Moreover, LifePoint foresees ongoing challenges ahead. The company now expects to generate profits of just $2.15 to $2.25 a share for the full year. On average, analysts have been forecasting 2007 profits of $2.60 a share instead.

"While we are not satisfied with our second-quarter performance ... we are taking appropriate actions to address these issues," LifePoint CEO William Carpenter stated on Monday. "We are confident that, by investing in and working closely with the communities in which we operate, we will be able to provide the highest quality care for our patients and at the same time drive enhanced value for our shareholders."

Ultimately, Carpenter added, "we are confident in the future success of our business."

But investors clearly have their doubts. They fled the stock, sending the shares down 13% to $33.92 -- a price unseen since early this year -- in heavy trading on Monday.

Jefferies analyst Frank Morgan warned of serious pain for the hospital group as a whole.

"We expect a very negative reaction on LifePoint's reported results," Morgan wrote early Monday morning. "We are particularly concerned about the spike in bad debt. ... While this sudden increase in bad debts may still be specific to LifePoint, we expect that the entire sector will trade down based on this news."

Indeed, shares of three major hospital chains -- Community Health (CYH), Tenet (THC) and Universal Health (UHS) -- all fell by more than 3% following LifePoint's warning.

Morgan has a hold recommendation on LifePoint's stock, which he valued at $42.50 ahead of the company's update. His firm makes a market in the company's securities.

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