HCA, HMA Sing Blues

Two hospital chains see little good news on the horizon.
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Chronic problems continue to plague rural and urban hospital operators alike.

On Tuesday, rural hospital chain

Health Management Associates

(HMA)

posted some of its weakest metrics in years. Meanwhile, urban hospital giant

HCA

(HCA) - Get Report

followed up on a recent profit warning by lowering its full-year guidance. HCA changed its forecast to exclude asset sales that have failed to go through in the tough industry environment.

Weak admissions and rising bad debts from the uninsured continue to hurt the hospital sector as a whole.

To be fair, HMA did manage to hit top- and bottom-line targets for the latest quarter. Revenue, helped by recent acquisitions, jumped 14% to $1.03 billion and actually came in a bit higher than Wall Street expectations. Meanwhile, operating profits of 37 cents a share matched the consensus estimate.

Still, the company's net income fell 13% to $87.2 million during the latest period. And the absence of hurricane insurance payments, which lifted year-ago results, accounted for only part of the downturn.

Notably, the company's expenses -- particularly for supplies -- increased at a faster rate than revenue did.

CRT Capital analyst Sheryl Skolnick expressed particular concern about HMA's same-hospital earnings before interest, taxes, depreciation and amortization. Even though same-hospital revenue climbed during the latest quarter, she noted, same-hospital EBITDA actually declined.

"That's not just a margin drop, either," she pointed out. "If this isn't a wake-up call, I don't know what is. ... Why does the Street continue to pay a premium for declining EBITDA dollars? In my mind, that is just stunning."

Skolnick recently initiated coverage of HMA with a sell recommendation. The company's stock inched up 16 cents to $21.21 on Tuesday.

Behind the Numbers

HCA fared a little worse, with its stock falling $1.04 to $45 on the latest update.

The company posted first-quarter revenue of $6.42 million that rose just 3.8% from a year ago and fell shy of Wall Street expectations. The company did report first-quarter profits of 92 cents a share that beat recently lowered forecasts by 3 pennies. However, the results included an 11-cent gain that came as a surprise to some.

"No one expected an 11-cent gain from the insurance subsidiary to be included in operating results," Skolnick insisted. "This should really require a re-valuation of HCA."

HCA issued new 2006 guidance of $3.10 and $3.30 a share, which now excludes previously anticipated gains from hospital sales to rural chain

LifePoint

(LPNT)

. However, Skolnick suggested, the new guidance includes insurance gains that most likely had never been baked into the current $3.21 consensus estimate.

Thus, she said, HCA has really cut its operating profit guidance to between $2.99 and $3.19 a share -- which is worse than even Wall Street's recently lowered forecasts.

Meanwhile, HCA saw net income actually fall by 8.5% to $379 million in the latest quarter. Worse yet, Skolnick noted, cash flow took an even bigger hit.

Specifically, HCA posted a 57% drop in cash flow to $365 million during the first quarter. The timing of tax payments caused most -- but far from all -- of the shortfall.

"Cash flow from operations was quite poor," Skolnick stressed. "Part of the HCA story has been that they just pump out the cash. So I want to know why they didn't" in the recent quarter.

Skolnick currently has a "fair-value" rating on HCA and -- excluding HMA -- the rest of the hospital group as well.

Calls for Change

Skolnick almost hung a sell recommendation on LifePoint, however.

She stopped herself, though, because she feels that activist shareholders could bring about necessary changes at the company. Already, Accipiter Capital Management -- which owns more than 1% of LifePoint's shares -- has at least delayed the company's purchase of five hospitals from HCA.

LifePoint wanted to expand its hospital portfolio further, even though its major acquisition of Province had already pressured its overall results. Accipiter, in turn, cried foul. Accipiter had even hoped to replace three current LifePoint directors with candidates of its own but apparently missed the nomination deadline that would have enabled it to do so.

Nevertheless, Skolnick still holds out some hope.

"Is Accipiter going to be the agent of change?" she asked. "I don't know. ... But having said that, I feel like they have raised absolutely valid points of criticism. On the facts, they are absolutely correct."

Skolnick would love to see a similar push for change at HMA. The company once ranked as a Wall Street darling because of its ability to post industry-leading metrics. However, it has suffered along with the rest during the current industry downturn.

During the latest period, for example, HMA weathered a drop in both inpatient and outpatient admissions on a same-hospital basis. At the same time, however, it saw uninsured admissions -- and, in turn, bad debt -- go up.

The company's ebitda margins took another hit as a result.

In the past, HMA has always relied on acquisitions to boost its overall performance. Only recently -- in the crushing industry environment -- has the company finally backed away from that plan.

Skolnick, for one, wants more.

"If there was ever a hospital stock that needed a really effective activist, this is the one," she insists. "Why shareholders put up with this nonsense is just beyond me."