Hospitals Back on Their Feet

The shares, which fell 13 cents on Friday, currently fetch just $56.54 instead.

Santangelo also likes LifePoint (LPNT Quote), a rural hospital operator. He believes the company will benefit from not only improving industry fundamentals but also its own expansion through its recent purchase of Province. Finally, he recommends Health Management Associates (HMA Quote) despite concerns about the company's recent underperformance and its ability to keep raising hospital prices going forward.

"We are not completely dismissing the concerns regarding the company's billing practices, but take comfort in the company's very public denial and the time that has elapsed since the original concerns surfaced in late 2003," Santangelo writes. Meanwhile, "we believe that the fundamentals are poised to turn in the second half of calendar 2005 and that the combination of the recent acquisitions and the easier comparisons will re-accelerate earnings growth."

HMA, which fell 28 cents to $25.90 on Friday, has trailed some of its peers with an 18% gain over the past year.

UBS analyst Kenneth Weakley -- who first raised HMA pricing concerns after exposing the aggressive pricing games at Tenet (THC Quote) -- offers a contrasting view. While he prefers HCA over his other neutral-rated hospital stocks, he recommends selling both LifePoint and HMA outright.

Notably, Weakley sees little reason to celebrate LifePoint's recent acquisition.

"From an investment perspective, our concerns relate to LifePoint's ability to realize an accretion to returns over the long run with the addition of Province," Weakley writes. "We remain concerned that LifePoint's willingness to buy Province may signal that its core assets are fully mature."

LifePoint's stock dropped 29 cents to $50.26 on Friday but has rocketed more than 35% over the past year.

Meanwhile, Weakely has come down even harder on HMA. Not only does HMA charge high prices that may prove unsustainable, he notes, but the company has seen its performance deteriorate already.

"HMA's earnings growth has lagged the group in recent quarters," he writes. And "we expect this trend to continue."

Weakley remains bearish on Tenet as well. He believes the company's legal issues remain "far from settled" and that its operations continue to be "very much challenged" in the meantime.

Jeff Villwock, a Caymus Partners analyst who conducts research on behalf of the Tenet Shareholder Committee -- a group long critical of company management -- tends to agree. Villwock believes the company's operational problems, in particular, will prove especially difficult to solve.

He says that Tenet's pricing is weak and its volumes are soft. Thus, he believes the company will be forced to sell even more assets -- perhaps as many as 15 hospitals -- by the time the year comes to an end.

"It will become obvious, as they go through the summer, which hospitals don't have a chance," Villwock says. "And they'll want to write those off by Dec. 31, so they can have another -- third -- fresh start."

Tenet's stock slipped a penny to $12.23 and, unlike the rest of the group, has lost some ground since this time last year.

To be fair, Villwock is more upbeat about the hospital industry in general. He believes that bad debt expense, while still high, has at least stabilized. He also expects most hospitals to report decent volume growth, especially for their lucrative outpatient business, going forward.

"Industrywide, I think hospitals will do a little better than they have -- and possibly even slightly better than anticipated," he says. "But Tenet, I don't think, is going to be quite so lucky."

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