HCA's

(HCA) - Get Report

stock hasn't been this sick in years.

Weakened already by recent downgrades, the stock took a feverish plunge Tuesday on news that a light flu season will hurt first-quarter earnings. The company now expects to deliver first-quarter profits of 81 cents to 83 cents a share, or about 9% below analysts' projections.

Tuesday's warning sent HCA shares tumbling 19% to $29.30 in early trading. The stock -- which fetched a record high $52 in June -- last neared $30 during a recovery rebound that followed an industrywide downturn three years ago.

Broad Challenges

While HCA blamed the earnings shortfall on unusual events, including the weak flu season, several analysts had expressed concerns about the company's overall earnings power just ahead of Tuesday's warning. Fulcrum analyst Sheryl Skolnick led the pack, downgrading HCA from buy to sell in February and then reiterating her sell recommendation early this month.

But Skolnick based her bearish view on broader challenges than those cited in HCA's warning. Skolnick believes the entire hospital sector, including industry leader HCA, could be headed into a healthcare bear market like the one five years ago. She specifically doubts that HCA can maintain its double-digit growth rate, given the current pressure on both Medicare and managed care pricing.

"We see far fewer positive catalysts for the company and for the group than we do negative catalysts," Skolnick wrote April 4. "We think

HCA's 2003 earnings estimates are more likely to go down than up."

Shrinkage

For now, HCA is portraying its problems as temporary. In addition to the weak flu season, the company blamed its recent slowdown on the closure of 17 skilled nursing centers and seven obstetrics units. The company, which continues to predict midteens profit growth going forward, is clearly expecting a rebound.

"We do not believe the first-quarter declines in hospital volume are indicative of a long-term trend," said CEO Jack Bovender. "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."

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But even the company admits that it faces challenges. In its recent annual report, HCA listed several developments -- including the Medicare "outlier" changes hammering

Tenet

(THC) - Get Report

-- that could threaten 2003 earnings. Those changes, in addition to the possible expensing of stock options, could whack up to 51 cents from estimated full-year profits of $3.12 a share.

Any cutbacks in government or managed care contracts would slice into earnings even further. Meanwhile, Medicare-related worries -- like those haunting Tenet -- are expected to keep pressure on the entire sector.

Skolnick, for one, is warning her clients away from healthcare stocks in general.

"The virus infecting one healthcare provider tends to spread rapidly -- despite the almost rampant use of private corporate jets in this space -- to other companies," Skolnick said. "There are many more interesting companies ...

that don't have Medicare fraud enforcement hanging over their stocks."

HCA's warning left virtually the entire sector in the red Tuesday morning. Besides HCA,

Lifepoint Hospitals

(LPNT)

weathered the biggest loss of the day, spiraling 12% to $20.92. Tenet also took a fresh hit, sinking 4.2% to $15.28. All three hospital chains are at, or within $2 of, 52-week lows.