took its medicine early, but the taste was still awful.
After warning in recent weeks of big charges and weathering a painful hit to its stock as a result, the nation's largest hospital chain reported an otherwise routine quarter Tuesday. Excluding special items, HCA matched Wall Street's second-quarter profit expectations to the penny. The Nashville, Tenn., company even offered a few mild upside surprises, hinting at a possible recovery from earlier weakness.
"Things didn't get worse than the first quarter," said Stephens analyst Nancy Weaver. "There were people predicting gloom and doom for the second quarter. ... And it looks like there's a possibility for mild improvement in the second half."
Weaver, who rates HCA a buy but doesn't own shares herself, was generally satisfied with HCA's second-quarter performance. But the market, still weaning itself from the fast-growth days of old, clearly wanted better. The stock took a fast hit in early trading, slipping 62 cents to $32.02.
The Price of Admission
Hurt by special charges, HCA posted a steep 31% drop in net income for the quarter. The company reported second-quarter profits of $240 million, or 47 cents a share. It earned $350 million, or 66 cents a share, during the same period last year.
Extraordinary charges for doubtful accounts and asset impairments shaved 28 cents from HCA per-share earnings. Excluding those items, HCA reported a second-quarter profit of 75 cents a share that was in line with analyst estimates.
Revenue jumped 12% to $5.5 billion, helped by 11 new hospitals acquired early in the quarter. Same-facility revenue climbed 7.1%, despite the tiny 0.6% hop in same-facility admissions. Same-facility outpatient surgical procedures actually declined 3.6% during the quarter.
HCA blamed its sluggish hospital volumes, particularly for outpatient procedures, on "general economic softness, higher unemployment levels in several key markets, increased co-pays and deductibles, non-renewal of a managed care contract in Tennessee and various competitive pressures in certain markets."
Indeed, HCA needed a strong month in June -- helped by more admission days -- to eke out the small hike in same-facility admissions. Before June, when same-facility admissions jumped 3.5%, HCA was weathering declines in monthly admission counts.
Weaver admits that HCA's June admission jump was skewed by admission days and should not be considered sustainable. But she sees reason to believe that HCA can achieve a 10% growth rate -- halfway between old expectations and current fears -- going forward.
Buying It Back
Based on that growth rate, she said, HCA looks cheap. She also pointed out that HCA itself clearly views the stock as undervalued. During the latest period alone, HCA spent $394 million -- or roughly $32 a share -- gobbling up 12.3 million shares of its own stock.
The stock, which dipped to a multiyear low of $27.30 after last quarter's slowdown, is still trading at its cheapest level since HCA was under fire for Medicare fraud allegations. The company recently settled the charges by agreeing to a record-breaking fine of $1.3 billion earlier this year. It paid the last of that fine -- some $641 million -- in the latest quarter.
Weaver blamed at least part of HCA's stock decline on a new Medicare fraud case, targeting hospital giant
, which is dogging the entire industry. But she disagreed with some experts who predict the current Tenet probe will suck in others throughout the sector.
"The industry just went through that," she said, pointing to HCA's recent settlement. "So I don't agree with that outlook. It seems a little bit simplistic."
But Fulcrum analyst Sheryl Skolnick, who downgraded HCA from neutral to sell last week, is more cautious. Fretting primarily over managed care contracts -- particularly negative pricing trends that did come to pass -- Skolnick warned of serious Medicare risks during discussions with
earlier this year.
"The virus infecting one health care provider," she said, "tends to spread rapidly ... to other companies."