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LifePoint Finds a Lifeboat

A strong quarter comes just as investors take aim at the struggling hospital company.

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-- a hospital chain under attack by its own shareholders -- strong first-quarter results could be just what the doctor ordered.

The rural hospital operator handily beat Wall Street expectations for the period, as efficient labor management helped offset falling same-store admissions and rising bad debt from the uninsured. Revenue, lifted by a controversial acquisition, more than doubled to $590 million during the latest quarter. Meanwhile, net income jumped a whopping 48% to $38.1 million. As a result, earnings per share of 60 cents came in well ahead of the 52-cent consensus estimate. Even excluding a gain from the recent sale of a hospital, first-quarter profits topped analysts' expectations.

The upside represented a welcome reversal to major disappointments that have triggered a shareholder revolt ahead of next month's annual meeting.

Bear Stearns analyst Jason Gurda, who downgraded LifePoint less than two months ago, now recommends buying the stock again. To be fair, Gurda attributed part of his optimism to potential Medicare boosts that could help other hospital operators as well. However, he clearly saw reason to feel hopeful about LifePoint in particular.

"While the company continues to face challenges in improving volumes and variable interest rate risk, we are encouraged that the operating deterioration experienced over the prior two quarters has stabilized," wrote Gurda, whose firm seeks to do business with the companies it covers. Notably, "LPNT's labor expense increased only 2.7% sequentially from the 4Q (ex option expense) -- its lowest 1Q increase ever. The company anticipated the weak flu season and staffed accordingly."

Still, LifePoint continues to suffer from familiar industry problems. For example, the company's same-hospital admissions fell by 4.3% during the latest period. At the same time, however, its bad-debt ratio -- a metric heavily linked to uninsured admissions -- rose from 8.4% to 12% of revenue.

The Accipiter Life Sciences Fund, a big shareholder pushing for changes at LifePoint, blames recent acquisitions for much of the company's problems. The fund has expressed particular concern about LifePoint's big acquisition of Province, another hospital chain, and its plans to buy five hospitals from giant


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In a letter last week to shareholders -- which sought votes for new directors -- Accipiter pointed out that LifePoint had paid a 66% premium for Province even though the company suffered from obvious challenges. For starters, the fund stressed, one former Province hospital failed to receive Medicare certification for a full six months. For another, the fund claimed, a second Province hospital looks so poorly located that it could shave as much as 3 cents from the company's earnings every quarter. More generally, it added, Province suffered from poor physician relations that should have loomed as a clear problem to management.

Accipiter singled out another recent purchase for scrutiny as well. The firm noted that LifePoint had acquired a hospital in an area where the largest employer had already filed for bankruptcy and the fifth-largest had closed a factory.

"We are astonished that the economic outlook

there was a surprise for LifePoint," Accipiter said. Still, "despite LifePoint's evident history of poor merger choices, we question whether management and the board learned any lessons."

Accipiter went on to point out that LifePoint had arranged to purchase five hospitals from HCA that were supposed to boost earnings but -- within five short months -- figured out that they would be a drain on results instead. LifePoint has extended negotiations on that deal but has yet to abandon it completely.

In the meantime, Accipiter claims, LifePoint rewarded its executives more handsomely than other hospital companies have. The firm, therefore, proposed replacing three directors but missed the deadline to do so. Shareholders are scheduled to gather for their annual meeting on May 8.

Thus, LifePoint's strong first-quarter performance came at a particularly crucial time for the company. Perhaps realizing as much, LifePoint CEO Kenneth Donahey promised more of the same.

"We are pleased with out first-quarter performance, which we view as a strong start for 2006," Donahey said on Thursday. "We appreciate the support of our loyal stockholders, and we look forward to continuing to implement our proven strategy during 2006. We are deeply focused on our core competencies and will remain focused on long-term results."

LifePoint shareholders expressed obvious relief. They pushed the stock up 6% to $31.65. Even so, the stock continues to trade near the low end of its wide 52-week range.