HCA Cheers Up Hospitals
HCA
(HCA) - Get Report
is making the whole hospital industry look healthy.
The industry giant on Monday announced robust first-quarter results driven by strengthening fundamentals. Specifically, the company said that patient volumes, hospital costs and bad debt expense -- all major sources of pressure in the past -- have shown improvement in the recent period. As a result, the company expects to easily beat the first-quarter consensus estimate of 76 cents a share with earnings of between 88 cents and 93 cents instead.
The move acted as a miracle cure for the sector as a whole. Besides HCA, at least three hospital chains --
LifePoint
(LPNT)
,
Tenet
(THC) - Get Report
and
Triad
(TRI) - Get Report
-- posted gains of more than 5% on Tuesday. HCA itself rocketed 8.1% to set a new 52-week high of $52.83.
Two analysts quickly upgraded the stock to buy even after it started bouncing.
"Why raise our rating now that the stock is up?" mused Fulcrum analyst Sheryl Skolnick. "The simple answer is because we think there is still more upside to the stock -- because when hospital fortunes turn positive, the margin leverage from better quality and quantity of patients in the beds is powerful."
Perhaps most notably, HCA seems to be treating more paying -- rather than nonpaying -- patients. Skolnick confessed that she felt "intrigued" by that positive development. Last quarter's improvement in bad debt expense came, in part, from an adjustment in reserves that some viewed as one-time in nature. And this quarter was expected to bring a rush of flu patients who often pay little or nothing for their treatment.
Instead, HCA apparently managed to attract a solid mix of patients and then collect more from them than usual. While investors must wait until next month's first-quarter report for details -- and updated full-year guidance -- Skolnick already feels reassured.
"A paying head is a paying head," she wrote. "And nothing besides price increases has as much margin leverage as stronger volumes."
Slimming Down
Skolnick cited yet another reason for her upgrade as well.
Two months after she suggested that HCA might sell some assets, the company has now followed through with exactly that plan. When updating its guidance on Monday, the company laid out plans to shed 10 noncore hospitals located in small markets across six states. Divestiture of the hospitals -- which account for about 3% of HCA's annual revenue -- is not expected to materially impact the company's results.
Fulcrum called the move a "key catalyst" for earnings improvement in the future. Lehman Brothers analyst Adam Feinstein, who upgraded HCA to overweight on Tuesday, offered a similarly positive view.
"This is not a surprise, with the company selling non-core assets since 1997," Feinstein wrote. "Also, we note that four hospitals are located in West Virginia -- a difficult market for hospital operators."
Together, he added, the 10 hospitals now up for sale have "below-company-average" margins.
Peter Young, a business consultant at HealthCare Strategic Issues, noticed much the same thing. He says the hospitals "either all have recently turned red in operations or barely in the black." All, he noted, have shown significant deterioration over the past three years.
Like Feinstein, Young highlighted the particularly tough West Virginia market. There, he said, the average hospital lost nearly $1 million last year.
Prudential analyst David Shove chimed in with similar observations. Indeed, he said that all 10 of the for-sale hospitals appear to be located in "increasingly undesirable" markets. He pointed to several market characteristics -- such as high malpractice insurance, strict regulations, potential Medicaid cuts and large uninsured populations -- as reasons.
So far, Shove has stopped short of upgrading HCA from neutral to buy. But he, too, now senses the potential for a turnaround at both HCA and other hospital companies.
"As an industry bellwether, HCA's improving fundamentals could indicate a brighter outlook for the hospital group," he wrote on Tuesday. "If so, hospital group valuations could be nearing an inflection point."
Staying Put
Still, at least one analyst feels reluctant to abandon his cautious stand just yet.
Kenneth Weakley of UBS continues to foresee challenges more than two years after his own groundbreaking research -- exposing weaknesses at Tenet -- triggered a downturn in the sector. He worries that HCA's recent progress may prove to be a "temporary blip" or, if not, wind up being a one-company phenomenon. He says that HCA operates the best class of hospitals in the group and could be gaining market share -- at the expense of others -- as a result.
Thus, he has yet to embrace HCA's solid quarter as good news for the entire sector.
"While this may be perhaps the most telegraphed preannouncement in years, we don't believe it is time to seriously consider a dramatic change to our macro thesis," wrote Weakley, who has a neutral rating on HCA shares. "We say, with confidence, that the volume issue ... is not yet evolved."
Likewise, Young sees cause for lingering concern. Indeed, he points to HCA's planned asset sale as a bad sign for the industry as a whole.
"We have great respect for HCA's operational skills, and for HCA to announce this size of divestiture is an example of how difficult the hospital industry has become," he said. "The difficult operating environment is a point that should not be lost when viewing the entire hospital industry."