Hospital Fans Watch HCA

With hospital companies preparing their latest quarterly results, investors might want to examine what happened behind the scenes last time around.

HCA (HCA Quote), the bellwether of the group, wound up desperate.

The giant hospital chain arranged one of the biggest leveraged buyouts ever, an effort to satisfy shareholders who would have otherwise pummeled the stock because of the company's lousy performance.

"You remember that report I wrote called 'Saved by an LBO?'" muses Sheryl Skolnick, senior vice president of CRT Capital Group. "I had no idea how right I was until I read what management and the board and the buyers were privy to. ... I didn't realize things were quite as dire as they portrayed them to be."

An internal presentation, made public through a regulatory filing last month, offers a chilling glimpse of just how tough the hospital business has become.

In the presentation, financial experts discuss the outlook for HCA -- under the code name "Hercules" -- and point to an LBO as the only quick cure for the company.

The presentation is brutally direct: The company's second-quarter results were "materially worse" than Wall Street expectations.

Moreover, the quality of the company's earnings was "extremely low" because of one-time gains.

Even worse, the company's full-year earnings would be "meaningfully below" analyst targets -- with the shortfall for 2007 looking "even greater."

"There is meaningful divergence between current Wall Street consensus estimates and Hercules management projections," the report states. "To the extent management, after reporting Q2-2006, provided revised FY 2006 and initial FY 2007 guidance, Hercules' stock would likely come under significant pressure and trade in the high-$30s range."