Hospitals Headed for Rough Quarter

Hospital chains like Tenet Healthcare (THC Quote) and Universal Health Services (UHS Quote) have just suffered through an especially painful third quarter.

Both companies, along with industry giant HCA (HCA Quote), weathered serious damage as a result of two recent hurricanes. Moreover, they have taken the big storm-related hits at a time when major challenges -- such as weak volumes and bad debts from the uninsured -- continue to hurt the industry as a whole.

Thus, some experts have started bracing for poor results from the group. Lehman Brothers analyst Adam Feinstein, in fact, downgraded the entire sector from positive to neutral on Monday in anticipation of a "very tough earnings season" for most of the companies he covers. (Lehman Brothers does and seeks to do business with companies covered in its research reports.)

"We believe it was a stormy quarter for the health care facilities sector -- both figuratively and literally," Feinstein explains. "We have very low visibility, and the only thing we are certain about is that there will be continued 'uncertainty' for the remainder of the year."

Previously, Feinstein notes, investors had hoped to see the hospital industry make some progress after a particularly rough June quarter. Instead, he notes, the sector found itself wounded further by hurricanes Katrina and Rita.

Still, he stresses, the group was hurting even before that destructive weather hit.

"We believe that the timing of the storms could not have been worse, with companies already experiencing lower utilization trends," he says. "As a result, we suggest that many companies will view this as a 'free pass' and take this opportunity to reduce expectations (or 'reset the bar'). Although the market may look past this issue since hurricanes are an extraordinary item, we do not anticipate a meaningful uptick in volumes anytime soon."

Indeed, Feinstein singled out one company with limited hurricane exposure -- Health Management Associates (HMA Quote) -- for an individual downgrade on Monday. He cut his recommendation on LifePoint Hospitals (LPNT Quote) from overweight to equal-weight as well.