Tenet

(THC) - Get Report

still has a pulse.

The ailing hospital chain, pumped by a new settlement with government authorities, continues to bleed money. But Tenet's latest quarterly report offered some hope to investors closely monitoring the company's weak vital signs.

Most notably, Tenet managed to buck an industry trend -- and heavy fallout from its own individual scandals -- by growing patient admissions during the latest quarter. But even a 2.5% surge in patient volumes wasn't enough to lift the bottom, or even the top, line at the company.

Hit by a steep drop in "outlier" payments, Medicare reimbursements for especially risky procedures, Tenet swung from a year-ago profit of $242 million to a second-quarter loss of $194 million. Excluding a slew of special charges totaling 69 cents a share, the company reported a quarterly profit of 27 cents a share that was in line with previous guidance and

enough to reassure the market.

Tenet's stock, already set to rocket on news of a government settlement, jumped 9.2% to $14.20.

Strong Words

But UBS analyst Kenneth Weakley -- the first on Wall Street to expose Tenet's heavy reliance on outliers -- withheld his own applause.

"Generally speaking, the fundamentals still look very soft," said Weakley, who has a reduce rating and a $10 price target on the stock. And "we continue to expect ... little, if any, visibility into what normalized growth for the company will be for several years to come."

For now, Tenet reported a 1.5% drop in second-quarter revenue, to $3.38 billion. The company blamed the dip on a plunge in high-margin outlier payments, which dwindled from $223 million a year ago to just $16 million in the latest quarter. Cash flow, while up from last quarter's alarming level, also got hit, spiraling 50% to $359 million.

In a conference call Thursday, one outspoken fund manager challenged Tenet leaders -- once again -- to provide some reason for investors to bet on the company's future.

"Investors need to know what

your compensation is going to buy them," said Lee Cooperman of Omega Advisors. There's been "nothing but value destroyed here."

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Tenet has issued earnings guidance for the next 12 months of 80 cents to $1 a share. But the company, still weaning itself from a chronic dependence on outliers, has yet to determine when -- and even if -- it can achieve industry-level growth going forward. Already, the company has warned that its heavy concentration in several "difficult," low-margin markets will make it hard to achieve the same margins as a giant like HCA.

Fine and Dandy

But Thursday's discussion was driven primarily by actions taken during Tenet's era of sizzling growth. Analysts peppered Tenet with questions about a big settlement with the government,

announced Wednesday, that ends a criminal probe into a Tenet hospital that once ranked among the most profitable, and outlier-dependent, in the company's entire chain. While moderate in absolute dollars, the $54 million fine ranks as the largest ever levied against a single hospital for allegedly performing unnecessary medical procedures.

Tenet -- and the market itself -- welcomed the settlement as a huge step forward. As the stock rocketed, acting CEO Trevor Fetter declared that Tenet had put "one of the most serious issues facing the company" behind it.

The settlement ends Tenet's exposure to further government fines for any unnecessary surgeries performed by two former heart surgeons at Redding Medical Center in California. But it by no means reassured everyone.

Indeed, probing questions from analysts revealed some new uneasiness Thursday. Specifically, some analysts wanted to know why Tenet would agree to pay a fine -- without any charges filed -- for activities that it had previously denied.

"What exactly is being settled there?" Banc of America's Gary Taylor asked, pointing out that Tenet had "stood by its corporate-compliance policies" in the past.

Tenet maintained that the criminal probe has always focused on two former Redding physicians -- heart surgeons Chae Hyun Moon and Fidel Realyvasquez Jr. -- instead of the hospital itself. But lead counsel Christi Sulzbach, who recently gave up her duties as compliance chief, said the company could have faced more financial exposure if certain procedures were found to be unwarranted. So Tenet essentially made a "strategic decision" to cap its losses and move on.

Redding "has been decimated ... as a result of this investigation," Sulzbach said, adding that the settlement allows the hospital to "draw a line in the sand and move forward from what has been a huge, black cloud."

No New Taxes

But that taint has already spread. Rocked by ongoing scandals, Tenet has lost a dozen hospital CEOs since the first of the year alone. And some on Wall Street view the Redding settlement as just a minor victory in a long, uncertain battle that lies ahead.

"We view Tenet's $54 million Redding settlement cost as a down payment on its potential full Redding legal damages," wrote Prudential analyst David Shove, who also has a sell rating and a $10 price target on the stock. "With the Department of Justice investigation ongoing and civil lawsuits unresolved, we believe Tenet's legal risk remains high."

In the meantime, Tenet is footing the bill for mounting legal costs at a time when cash is short. None of the $54 million settlement with the government, for example, was covered by the company's insurance. Nor will any fraud settlements be covered if they arise from civil litigation.

So far, Weakley has seen no indication that the company will get off cheap. Certainly, he views the $54 million settlement celebrated by the market as anything but a bargain.

"While $54 million is not an immense number ... this settlement is only for one facility," he pointed out.

In comparison, he said, HCA paid "less than $10 million" per hospital in its massive settlement with the government. Tenet counts 114 facilities among its hospital chain.