Health Management Associates

(HMA)

has undergone another lousy checkup.

Banc of America analyst Gary Taylor, once an HMA bull, issued a second opinion on the company Tuesday. Taylor downgraded HMA from buy to neutral because of a "material earnings quality concern" following a close review of the company's latest quarterly results. He is the third major stock analyst to raise serious questions about the popular hospital chain.

UBS analyst Kenneth Weakley has compared HMA's pricing strategies to those he exposed at

Tenet

(THC) - Get Report

. Meanwhile, Fulcrum analyst Sheryl Skolnick has fretted over HMA's declining margins and cash flow. Both analysts recommend selling the company's stock.

Still, Taylor isn't ready to join the bear camp just yet.

"We do not subscribe to the broader conspiracy theories," he explained, "and consider HMA a core holding in the facilities sector."

Even so, Taylor is questioning the health of HMA's earnings. Specifically, he suspects that the company may be under-reserving for liabilities -- causing a reduction in "days accrual" -- in order to deliver the aggressive profit growth that Wall Street has come to expect.

"It appears to us that meeting consensus estimates has been a stretch," he wrote. "A decline in days accruals has correctly foreshadowed seven of the last eight material EPS (earnings per share) misses in the group. So call us nervous."

Taylor went on to note that within his coverage universe, HMA and only one other hospital chain --

Community Health

(CYH) - Get Report

-- have not materially lowered earnings guidance over the past 18 months. Because of his concerns about possible earnings management, Taylor has gone ahead and lowered both his own expectations for HMA and his target price for the stock. He cut his 2005 profit forecast, which was already below the $1.56 consensus, to $1.39 a share, and created a new bottom for the range.

Through changes in reserves, Taylor worries, some $85 million -- or 21 cents a share after tax -- may have "leaked from

HMA's balance sheet into reported EPS over the last year." He believes the maneuver, if performed, could wind up costing HMA at least 15 cents a share next year.

Taylor also reduced his target price for the stock from $28 to $23 a share. The stock, already trading below that level, fell 2.9% to $21.60 on his downgrade.

By now, Taylor has expressed concerns about the quality of HMA's earnings on three separate occasions. When issuing his downgrade on Tuesday, he noted that a "strong correlation" exists between a company's earnings quality and its overall stock performance. He believes that HMA's earnings quality is lower than average and that the company's stock could, therefore, underperform the market.

Taylor finally downgraded HMA after detecting a large -- and so far unexplained -- decline in days accrual during the latest quarter. He believes the reduction is caused by a decline in reserves or a negative working capital trend that for some reason continues to pressure cash flow. He is still waiting for answers.

"Management has not yet explained what factors could be causing working capital to expand materially (via declining accrued liabilities) and reduce reported cash flow from operations," he wrote. "Thus, it remains difficult for us to have visibility and confidence that the trend will materially reverse."

To be fair, Taylor admitted that he could be wrong about the stock. He said the shares could fare better than expected if HMA's rapid growth -- excluding acquisitions -- resumes. He concedes that even future acquisitions could help out, too, but he notes that they might come at a high price and that "first-year EPS accretion isn't a guarantee anymore." In addition, he suggests that HMA could boost EPS through share repurchases. He also says the company could simply look inexpensive to investors who are willing to focus on "reported" EPS instead of less favorable metrics.

Moreover, Taylor acknowledges that his concerns about possible earnings management -- which triggered the downgrade -- could prove unfounded. Still, he remains skeptical.

"A decline in gross accruals while revenue is growing creates an immediate red flag," he wrote. "Legitimate business reasons may exist ... but further investigation is warranted."