condition looks a bit worse than first diagnosed.
The nation's largest hospital chain warned last week that unusual developments, including a light flu season, would drop first-quarter earnings below expectations. It followed up Tuesday by reporting first-quarter profits of 82 cents a share, smack in the middle of its new target and a penny better than recently cut estimates on Wall Street.
But HCA's full earnings report did offer some troubling new details that indicate the company's recent setbacks -- unlike the flu season -- could be more than temporary.
For example, the company revised its primary reason for slower growth in emergency room visits and a 2.9% decline in outpatient surgeries. Mounting competition, mentioned in a string of factors last week, is now being listed as the primary cause for the shortfall.
Meanwhile, HCA has taken some deliberate actions -- already cited in last week's warning -- that will end some profit streams altogether. The company closed 17 skilled nursing centers and seven obstetrics units, moves that together with the light flu season cut patient admissions significantly.
Still, the company continues to reiterate its belief that its troubles will soon pass.
"We do not believe the first-quarter declines in hospital volumes are indicative of a trend," HCA CEO Jack Bovender repeated Tuesday. "At this time, we see no reason to change the company's overall strategy."
The stock, hammered by last week's warning, barely budged on the earnings report. After a brief 2.8% jump to $29.24 near the open, it fell back to $28.60 as the morning wore on. The stock continues to hover near the three-year low it approached last week.
After a series of downgrades this month, many analysts have stopped recommending the stock. Even Prudential analyst David Shove -- who still likes the stock -- now doubts that HCA will hit its 15% profit-growth target for the year.
"Although HCA believes 1Q03 volume shortfall is not indicative of long-term trends, we believe 1Q03 volume trends support our thesis of slowing utilization growth rates due to managed care effectiveness and a weak economy," Shove wrote in a recent research note. "Looking forward, we expect HCA's earnings growth rate to be in the 9%-10% range."
Nevertheless, Shove believes HCA is an undervalued stock that could return to $40 within a year.
But Fulcrum analyst Sheryl Skolnick, who actually upgraded HCA to hold after the recent selloff, has warned that the entire health care sector faces potential obstacles going forward. HCA itself cautioned again on Tuesday that industry challenges lie ahead. It specifically mentioned changes in Medicare "outlier" payments -- the controversial charges that powered
recent growth -- as a concern.
But HCA also faces individual challenges. During the latest quarter, the company saw operating costs and bad debts climb. Shove deemed the sharp rise in bad debt expense "puzzling" and fretted over its cut into profit margins. Capital expenditures also jumped 23% during the quarter to $464 million.
Still, HCA reported strengths elsewhere. The company's earnings per share climbed 7.9% from a year ago. And its cash flow from operations surged 24% to $755 million. Overall revenue also jumped, swelling 8.2% to $5.3 billion.
Bovender, for one, remains optimistic.
"While we may experience weaker-than-expected volume trends from time to time, due to seasonal disease patterns and other market-specific factors," he said, "the overall demographic trends in the country and our market presence in fast-growing, major metropolitan areas should drive, we believe, continuing growth for HCA."
Despite analyst doubts, HCA continues to see its mid-teen EPS growth rate as sustainable.