HMA Finally Delivers Strong Results

OKLAHOMA CITY -- Health Management Associates HMA is staging a comeback just in the nick of time.

The rural hospital operator posted solid first-quarter results less than a month ahead of a crucial shareholder meeting. The company managed to attract more patients and charge them higher prices than it did a year ago, while beating Wall Street expectations in the process.

The company's net income, helped by special gains, soared almost 140% to $134 million in the latest quarter. Meanwhile, its earnings per share of 15 cents topped the consensus estimate by two pennies.

"We expect market reaction to be positive," CRT Capital Group analyst Sheryl Skolnick predicted Wednesday morning. After all, "this is the first apparently clean upside relative to consensus that HMA has reported in a very long time."

HMA's stock jumped 4.6% to $6.15 following the update.

The entire hospital sector has been hurt in recent years by weak volumes and rising bad debts from the uninsured. However, HMA's first-quarter report triggered some hope. Several hospital operators, preparing to release their own updates soon, bounced on Wednesday's earnings report.

Ailing Tenet THC climbed almost as much as HMA did, in fact, rising 4.4% to $5.45. Meanwhile, Community Health Services CYH and Universal Health Services UHS posted gains of more than 2%.

The upbeat earnings report couldn't have come at a better time for HMA. Earlier this week, an activist group started calling for the ouster of two HMA directors due to the company's underperformance. Shareholders will decide the fate of those directors -- including the chairman of HMA's compensation committee -- when they gather for their annual meeting on May 13.

Meanwhile, HMA still has some stiff challenges. While the company's same-hospital admissions technically increased in the first quarter, they inched up less than 1% in the end. Emergency-room admissions did climb more, rising a solid 6.3%, but they often include uninsured patients who cannot pay their bills. Meanwhile, surgery admissions -- which tend to be far more lucrative -- actually declined.

Other metrics also looked somewhat weak. Total revenue, while up 4% to $1.15 billion, fell short of the consensus estimate. Moreover, almost 23% of that sum came from "uncompensated care" that hurts the bottom line.

Notably, HMA also reported a clear decline in earnings before interest, taxes, depreciation and amortization. The company's shrinking EBITDA margin took another hit as well.

Skolnick felt troubled by that deterioration.

"HMA clearly has done little to reverse this disturbing trend," Skolnick wrote. "Unless and until HMA can grow its same-store EBITDA, we will not be convinced that the turnaround strategies have rooted and are sustainable."

HMA's outlook is somewhat cautious, as the company merely kept its full-year guidance intact. HMA expects to earn between 40 cents and 50 cents a share this year. The current consensus estimate rests at the midpoint of that range.

"If management is cautious, then we must be, too," Skolnick concluded. "At current prices, HMA neither represents a compelling long or short investment opportunity, in our view, and so we believe our 'fair value' rating is appropriate."

Most analysts, including some former HMA bulls, hold a similar view.