HCA Fights Off Slowdown Bug

The stock bounces, but some see a sinking trend.
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To some,

HCA

(HCA) - Get Report

looked a whole lot healthier this time last year.

The giant hospital chain has, once again, managed to meet Wall Street expectations in a tough industry environment. Early Friday, the Nashville-based company said it expects to make 74 cents a share for the fourth quarter and $3.19 for the year, up from its previous $3.15 annual forecast.

But the company has found itself relying less on favorable trends -- such as a slowdown in bad debts from the uninsured -- than it did a year ago. Indeed, HCA continues to see more and more uninsured patients filling its beds instead.

"Last year, the rate of uninsured growth slowed very significantly, bad debt was lower, and everybody was happy," recalls CRT Capital analyst Sheryl Skolnick, who doesn't own the stock and has yet to establish a rating on it. CRT does no banking for HCA.

"We need to wait before we get too excited" this time around, she adds.

But investors showed little restraint on Friday. They pushed shares of HCA up $2.07, or 4.2%, to $51.26 halfway through the morning session.

Excluding special items, Skolnick estimates, HCA will post a fourth-quarter profit of 69 cents a share -- or 4 cents above the consensus forecast. The company also expects to meet its previous 2006 guidance of between $3.25 and $3.45 a share with help from a 15-cent gain on asset sales.

Yet some key metrics for the company look weak. During the fourth quarter, patient volumes inched up just 0.3% overall. Meanwhile, uninsured admissions rocketed by 15%. As a result, the company saw 13.4% of its revenue -- or $860 million -- eaten away by write-offs and discounts for the uninsured. HCA gave away another $281 million in charity care for the poor.

To be fair, the company did benefit from some favorable developments in the latest period. In addition to enjoying gains on recent asset sales, it found itself able to lower its reserves for liability insurance as well.

But Peter Young, a business consultant at HealthCare Strategic Issues who has no position in the stock, could not be distracted.

"It's all about the operations -- not one-time gains on sales and reductions in malpractice claims," he stressed. And "very flat volumes and increasing numbers of charity care and indigent admissions reflect continued erosion of net revenue from patient services."

Behind the Numbers

During the latest quarter, total revenue rose by 5.1% to $6.2 billion and actually beat the consensus estimate by $500 million.

However, same-facility revenue grew at a slower rate of 4.8%. Meanwhile, same-facility revenue per equivalent admission -- which includes lucrative outpatient cases -- climbed just 4.1%, as competition from physician-owned outpatient facilities continued to heat up.

"Notice the company did not want to provide in- and outpatient admission figures, choosing instead to provide 'equivalent' admissions," Young pointed out. But "the very weak growth in equivalent admissions indicates a very significant slowdown in business when compared to the overall increase in outpatient services for the healthcare sector."

Looking ahead, HCA does plan to increase same-facility revenue by 6% to 7% next year. However, the company expects uninsured admissions to keep on growing and hurting the bottom line as well. Moreover, Skolnick suspects, the company may not even collect the full one-time gain that is supposed to help out in the end.

Notably, she points out, HCA expects to realize that gain from assets that the buyer --

LifePoint Hospitals

(LPNT)

-- believes have deteriorated in value since the transaction was first arranged.

In the meantime, Skolnick questions whether HCA can keep on ending every year with a bang.

"This is the second year in a row that HCA has pulled a rabbit out of its hat and managed to beat expectations," she says. "If they don't watch it, they're going to set a very high hurdle" for the future.