Hospital Trends Perk Up
The long-suffering hospital industry is feeling some relief.
While clearly still on the mend, the sector has seen its vital signs grow stronger during the current quarter. Patient volumes are rising. Bad debts from the uninsured appear to be stabilizing. And further complications -- such as draconian cuts to Medicare -- seem to be less likely.
Sensing a possible near-term recovery, one industry bear has now upgraded the group. Banc of America analyst Gary Taylor on Friday raised his recommendation on the sector from underweight to market weight -- and lifted both
LifePoint
(LPNT)
and
Triad
(TRI) - Get Report
to buy -- on the basis of recent signs of strength within the industry.
For starters, Taylor said, many hospitals are reporting a jump in February admissions caused only in part by a spike in typically low-margin flu-related business. He also said physicians have been writing more new prescriptions, a trend that often signals a rise in hospitalizations. Finally, he added, fresh data indicate that Medicare looks solvent enough to delay any major cuts for the time being.
Even so, Taylor stopped well short of providing the sector with a clean bill of health.
"Despite this positive near-term stock call, we still have difficulty constructing a positive two-to-three-year view for the sector," Taylor wrote on Friday. "We do not suggest overweighting the group into a forward environment of softening commercial pricing yields, near-term Medicaid risk, still-fragile Medicare outlook, accelerating capacity/capital competition and rebounding labor costs."
Recovery Room
Still, Taylor at least sees reason for hope. In a recent survey of nonprofit hospitals, he said, 64% reported a rise in February admissions despite the longer month (due to leap year) in 2004. Moreover, he said, 52% posted higher volumes even after subtracting out flu and upper-respiratory cases. Importantly, he added, many of those hospitals attributed at least part of the jump to patients with commercial insurance.
Based on that survey, Taylor believes "a modest pickup in commercial demand may be percolating."
Taylor has also issued a second, more favorable opinion on the outlook for Medicare. Previously, Taylor worried that this year's review would show Medicare reaching insolvency in less than 10 years. He noted that similar results in the past "led to the two most onerous reimbursement cuts in the history of the Medicare program." But recent tax data, he said, indicate that Medicare's projected insolvency date should extend past that crucial 10-year window.
"Thus, the 2005 report becomes a 'non-event,' and material Medicare reimbursement risk is pushed out to at least federal fiscal 2007," he wrote.
As a result, Taylor has increased his price targets for the hospital group by 10%. And he now expects LifePoint and Triad to outperform the rest. He believes that LifePoint's pending acquisition of
Province
(PRV)
creates new opportunities for profit growth. And he predicts that Triad will continue its long trend of delivering strong returns to investors.
Both stocks jumped on the upgrades. LifePoint climbed 3.2% to $41.25. Triad rose 2.7% to $45.45.
Sick Ward
Taylor did leave one hospital stock in the sick ward, however. He continues to recommend selling shares of troubled
Tenet
(THC) - Get Report
.
Tenet has been crippled in recent years by a slew of legal problems. This week, the company seemed to take one step forward and two steps back. It reached an agreement to settle a number of class-action lawsuits that had attacked its high prices for the uninsured. But it also revealed a legal setback in a high-profile criminal case against the company.
This week, a federal court denied a motion to acquit a Tenet-owned hospital and its CEO of conspiracy and other criminal charges. The defendants are accused of illegally bribing doctors in exchange for patient referrals. After a mistrial last month, the court did throw out two of the counts -- but left 18 intact.
Tenet now faces the possibility of a second trial in early May. The company's stock slipped 3 cents to $10.79 on Friday.
Elsewhere in the health care sector,
Bradley Pharmaceuticals
( BDY) is feeling some pain of its own.
The specialty drug company announced a slew of negative developments on Friday. It faces several class-action lawsuits after becoming the recent target of a regulatory probe. It cannot file its annual report on time because of questions about its accounting. And it has found itself unable to calculate earnings guidance as a result of its headaches.
The company's stock plunged 11% to $8.55 -- a 52-week low -- on the news. It has long been a favorite target of short-sellers, who continue to place big bets against the company.