could be on the road to recovery.
The company, which ranks as the largest for-profit hospital operator in the country, has reported even healthier first-quarter results than many people expected. The company posted quarterly profits of 95 cents a share -- up 38% from a year ago -- that beat the consensus estimate by 7 cents and exceeded its own raised forecast as well. The company also boosted its full-year guidance by 30 cents to between $3.05 and $3.20 a share.
HCA pointed to improvements in bad debt expense and patient admissions as reasons for the strong quarter.
Still, Prudential analyst David Shove viewed the results as mixed at best. He acknowledged that the company had posted its best bad-debt ratio in two years. But he had hoped to see meaningful improvement in patient volumes as well.
"Although we are encouraged by the improvement in bad debt, we remain very concerned about volume growth," writes Shove, who has a neutral rating on HCA's stock. "This rate should not sustain earnings growth on a secular basis."
HCA was flat Thursday despite the upside earnings surprise. And some experts believe that HCA is faring better than most.
"I view HCA as having the best management in the hospital sector and much further along in implementing new health care business strategies than the rest of the sector," says Peter Young, a business consultant at HealthCare Strategic Issues. "As such, I suggest others' performance will lag HCA for the year."
Young cautions against banking on a broad and lasting recovery. Ultimately, he foresees an "OK" year for the group before conditions take a turn for the worse -- once again -- in 2006.
During the quarter, HCA did manage to increase both inpatient and outpatient volumes.
Same-hospital admissions rose 1%, and outpatient surgeries -- which can be especially lucrative -- increased by a stronger 1.5%. As a result, total revenues jumped 4.1% to $6.2 billion. That figure came in lower than the $6.32 billion consensus estimate but was impacted, in part, by charity write-offs that will lower bad-debt expense down the road.
Bad debt from the uninsured -- a key metric for the industry -- is already showing improvement. The company's provision for doubtful accounts dropped from 11.7% of revenue a year ago to 9.3% in the recent quarter.
Young applauded the company's ability to improve its bad-debt ratio even as emergency room visits -- often made by the uninsured -- jumped by 7.9% during the recent flu season.
"The bad-debt improvement, while small, is really a much greater improvement when viewed in terms of the hospital's front door," he said. "To have been able to decrease bad debt during a strong ER volume increase is a tribute to HCA's management skills."
Still, that modest improvement may have disappointed those hoping for more.
"Sequentially, the YTY growth in uninsured and ER visits
," stressed Banc of America analyst Gary Taylor, who has a neutral rating on HCA's shares. So "the bad-debt bulls did not have their day."
Those bulls have been counting on strong results from the sector overall.
Last week, Stephens analyst Nancy Weaver predicted that the entire group -- excluding troubled
-- could beat Wall Street expectations. HCA already has topped her own first-quarter estimate. Weaver is now looking for
to do the same.
She even offered a few words of optimism about the company that's struggling the most.
"We are more hopeful about
Tenet this quarter, given the improved industry outlook," Weaver wrote. But "we remain on the sidelines until earnings visibility improves."
Leerink Swann analyst Ann Hynes is pushing investors toward three other companies -- Universal, Triad and
-- instead. Hynes believes that Universal could be poised to exceed its 2005 targets even if it doesn't raise guidance when it reports first-quarter results. Meanwhile, she feels that Triad offers the greatest upside potential on a long-term basis. She sees similar potential at Community -- her favorite rural hospital operator -- as well.
For his part, Shove has yet to recommend any of the stocks. Earlier this week, he was already expressing some concern that HCA might disappoint "overexcited" investors with tepid volume growth. And he worried that the stocks -- which have rallied hard so far this year -- might stall if that did, in fact, happen.
He was looking for "glimmers of hope" that he didn't necessarily find.
"Savvy investors will likely vet the 1Q05 earnings season for signs that admission volume growth may be coming back," wrote Shove, who has an unfavorable view on the sector overall. "Absent these signs, hospital valuations will likely remain stuck in current valuation levels."