Skip to main content

Hospitals Can't Kill the Pain

Investors prepare for a very rough string of quarterly reports following a warning from leader HCA.


(HCA) - Get Free Report

has left hospital investors bracing for a sick quarter from the group.

The nation's largest for-profit hospital chain

warned last week that operating results for both this year and next will fall well short of Wall Street expectations. The company continues to struggle with weak admissions and bad debt from the uninsured, problems only worsened by the violent hurricane season. It plans to ease the pain, however, with yet another gigantic share repurchase program like the one that led up to a long rally in the stock a year ago.

Still, some experts believe that HCA will need a more powerful cure this time around.

"We certainly got a case of deja vu," admitted Morgan Stanley analyst Gary Lieberman, who has an equal-weight rating on the company's stock. But "the difference this time is that HCA is much less likely to experience the same degree of (earnings) upside as it did in the beginning of 2005."

Lieberman points to lasting hurricane damage and a recent jump in uninsured admissions -- the largest in more than a year -- when explaining his cautious stand.

Of course, UBS analyst Kenneth Weakley has been expressing caution all along. Days before HCA's warning, in fact, Weakley predicted that the company would preannounce a shortfall -- along with another big stock repurchase plan -- as a result of hurricane-related losses and ongoing challenges for the industry. He insisted that weak volumes and "stubbornly high" bad-debt levels would continue to plague the group.

Moreover, Weakley went on to challenge those who might disagree. He criticized the "endless tail-chasing" by some hospital analysts who still hunt for signs of a growth industry. And he essentially blamed them, in part, for volatile moves in hospital stocks that have little to do with industry fundamentals.

But going forward, he suggested, investors may finally catch on.

"The overall summary here is that while some on the Street contend that the hospital sector -- because of demographics -- is well positioned for solid long-term growth, the economic profile of the sector is still suggestive of difficult times ahead," Weakley wrote last week. And "the market's willingness to wait


quarter for improvements in top-line performance (volume) and margins (bad debt) to manifest is likely fading."

Following pressure created by HCA's warning on Thursday, however, hospital stocks reversed course and started climbing Friday. HCA jumped 2.2% to $47.55.

Scary Sequel

Nevertheless, Deutsche Bank analyst Darren Lehrich continues to wait for more bad news from the group. He feels concerned about

Health Management Associates



Tenet Healthcare

(THC) - Get Free Report


Universal Health Services

(UHS) - Get Free Report

in particular. He has hold recommendations on all three.

Lehrich does expect HMA to meet fourth-quarter expectations with profit of 37 cents a share. However, he worries that 2006 guidance could fall short of Wall Street estimates due to a rise in uncompensated care.

Meanwhile, Lehrich believes that Tenet has weathered "significant fallout" from Hurricane Katrina. The company operates six hospitals in the hurricane-ravaged area, he notes, including two that remain out of commission indefinitely. Even so, Lehrich expects Tenet to beat the consensus estimate by 2 cents, with a quarterly loss of just 3 cents a share.

In contrast, Weakley believes that Tenet will post an 8-cent loss.

"Given the significant hurricane damage to its six Gulf Coast facilities, potential legal issues on the number of deceased found in one of its hospitals following the storm, along with management suggesting that cost will be 'substantial,' we expect another challenging quarter for Tenet," wrote Weakley, who has a reduce recommendation on the stock. In the meantime, "the issues that prevent much economic progress appear to still be in place."

For his part, Lehrich seems more worried about Universal's third-quarter results. Quite bluntly, he says, the company "could post a significant EPS miss." He points to hurricane damage and ongoing competitive pressures in south Texas as the reasons. Ultimately, he believes that Universal will post third-quarter profit of 52 cents instead of the 60 cents Wall Street has projected.

Lehrich foresees a big shortfall at

Triad Hospitals

(TRI) - Get Free Report

as well. He likes Triad's long-term prospects -- and even has a buy recommendation on the stock -- but worries that bad-debt problems could hurt near-term results. Thus, he estimates that Triad will post third-quarter profit of 57 cents a share that fall 6 cents short of the consensus expectation.

Lehrich feels considerably more optimistic about rural hospital operators

LifePoint Hospitals



Community Health Systems

(CYH) - Get Free Report

. He believes that LifePoint will top third-quarter projections by 2 pennies with earnings of 62 cents a share. Similarly, he expects Community to beat the consensus estimate by a penny with earnings of 46 cents a share.

Even bearish Weakley sees plenty to like at Community, his only buy-rated stock in the sector.

"We believe that its growth dynamics are the most impressive in the group, that its management team is likely to focus on the most economically relevant pressure points to contain costs and that its acquisition pace and track record point to solid execution for growth," Weakley explained. But "for the balance of the group, the upcoming earnings season will prove challenging for those who have maintained a bullish stance on the sector's fundamentals."