Hospital Stocks Are Looking Healthier

The sector rises in spite of mixed numbers released from two of its big operators.
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Hospital stocks proved immune to weak quarterly reports on Friday.

Shares of

HCA

(HCA) - Get Report

and

Universal Health

(UHS) - Get Report

rose -- lifting the entire sector -- despite third-quarter misses by both companies. HCA, which took its medicine with last week's profit warning, posted third-quarter earnings of 47 cents that fell a penny shy of recently lowered estimates. Universal suffered an even bigger miss, reporting operating profits of 63 cents a share instead of the 68 cents Wall Street had expected.

Sensing further symptoms of industry turmoil, analysts expressed more concern than the market itself. Indeed, one even suggested that Universal Health might reduce its focus on acute care services in light of worsening industry conditions.

"Unless it can effect improvement in the acute-care unit earnings soon, Universal Health Services may have to redefine its operating strategy where acute-care operations are downsized to efficient scale," wrote Prudential analyst David Shove, who has a neutral rating on the stock. "Over time, we project behavioral health hospitals will assume a greater share of overall earnings."

For now, Universal continues to suffer. The company posted third-quarter revenue of $1.01 billion -- shy of the $1.02 billion consensus estimate -- as both admissions and patient days declined at its acute care facilities. Shove described the company's revenue growth as "feeble" and its acute-care admission decline as "startling." He also pointed out that bad-debt expense "rose sharply," climbing to 8.1% of revenue from 6.7% a year ago, even though he had actually expected worse.

Shove applauded third-quarter results from the behavioral health unit, however. He called the unit's revenue increase of 8% strong, its admission growth of 5% robust and its pricing jump of 2.4% good. He says the company now faces the "enviable problem" of creating sufficient capacity to address rising demand for its behavioral health services.

Investors treated the entire report as good news. Shares of Universal rose 2.3% to $40.77 late Friday morning.

HCA posted an even larger gain, jumping 3.2% to $36.20, despite its poor results. The company met third-quarter revenue estimates of $5.8 billion but saw net income spiral by 26% to $227 million. Like Universal, HCA suffered big hurricane-related losses during the quarter. But ongoing problems -- particularly bad-debt expenses from the uninsured -- hammered its results as well.

For example, some 21% of the patients treated in HCA emergency rooms last quarter carried no insurance. The company's overall bad-debt expense, which totaled 10.3% of revenue a year ago, climbed to 11.9% during the period.

Shove worries about even Universal's lower bad-debt ratio. Indeed, when reviewing the company's latest results, he continued to voice concerns about acute-care trends in general.

"Despite its best efforts, Universal Health Services can not stop the admission volume deterioration," he wrote. The company "needs to double its turnaround efforts or face the possibility of more asset sales."