Triad's a Target to Some

Sheryl Skolnick, senior vice president of CRT Capital Group, sees both validity and shortcomings in Taylor's call.

Skolnick agrees that Triad's earnings quality looks "lousy" and that its cash flow has been weak. But she questions whether poor accounting -- involving depreciation or bad debts -- is really to blame.

She notes that Triad emerged as a spinoff from HCA and has been valuing the assets it inherited under "pooled" accounting as a result. Because of this, she says, many Triad hospitals remain on the company's balance sheet with very old book values. In turn, she adds, depreciation expense looks lower than it otherwise would.

Skolnick concedes that Triad could, in fact, be treating uninsured revenues -- and the bad debts they create -- too aggressively. But she wonders whether the company deserves to be singled out.

"My point is that if you condemn Triad for having very, very, very large write-offs for bad debts, then you better condemn everybody in the hospital space," says Skolnick, who recommends buying Triad as a possible takeover play. "Every company -- every single one of them -- has, at some point, been too optimistic or aggressive about recognizing revenues as realizable that ultimately were not."

Still, Taylor views Triad as more vulnerable than most.

He studied the entire sector and concluded that, following recent changes, most hospital companies -- including Community Health , LifePoint and HCA -- have established adequate reserves to cover shortfalls from bad debts. He portrayed Triad as the only real outlier in the group.

"Triad," he says, pointing to a measure of earnings quality, "simply fails our tests in dramatic fashion."

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