Taking a Look at Tenet

Investors will get a chance with earnings Tuesday.
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Old wounds are showing some healing signs at


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Most investors expect the hospital chain to report another quarterly loss when it publishes its latest results on Tuesday. But fans could push the company's stock higher if the pain seems manageable and the chances for recovery have started to improve.

Tenet has spent years trying to cure massive legal headaches. Now, the company has endured two criminal trials and, some feel, could soon ink a long-awaited government settlement as a result.

In the meantime, CRT Capital analyst Sheryl Skolnick has a fair value rating on Tenet's stock -- but with a positive bias -- heading into Tuesday morning's first-quarter earnings release.

On the one hand, Skolnick calls it "blindingly obvious" that Tenet will report weak volumes like many of its healthier peers. Indeed, she believes that negative industry trends, coupled with what she calls the Tenet penalty, could have sent patient admissions down 2% from a year ago. She also expects the company to report a loss of 4 cents a share -- or double the consensus estimate -- for the quarter. She continues to brace for negative cash flow, after capital expenditures, as well.

On the other hand, Skolnick suggests that investors have grown somewhat numb to poor results from the company.

"The stock probably won't go down if the results are in line" with investors' low expectations, she said. "The stock is more likely to be stable to up -- especially if investors get the sense that the company is making progress toward a settlement."

Back in February, Tenet's stock hit a multiyear low of $6.89 a share as the latest criminal trial dragged on. However, the stock recently bounced above $9 for the first time in months after a jury deadlocked over whether the defendants had illegally bribed physicians in exchange for patient referrals. The stock has since weakened, though, closing at $7.96 on Monday.

Lowering the Bar

Deutsche Bank analyst Darren Lehrich scaled back his expectations for the company last month.

Lehrich predicted that Tenet would lose 5 cents a share on a 1% drop in same-store volumes. Already, he noted,


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had reported weak volumes in Tenet's important market of Florida. Thus, he assumed, Tenet would suffer from a slowdown there as well, as it kicks off yet another money-losing year.

Looking ahead, Lehrich hopes to see Tenet "return to normalized profitability" by 2007 or 2008. But he foresees some major losses in the meantime. Notably, he believes that Tenet could shell out as much as $1.5 billion to settle various charges with the feds.

"Our ($8) price target does not include any government settlements," he stressed. "And we note that each $1 billion in fines results in a negative $1 per share impact to THC's equity value. ... (Meanwhile), we remain on the sidelines on THC, as we believe the fundamental issues of weak volumes and poor margin performance will take quarters -- if not years -- to result in better financial results."

Deutsche Bank seeks to do business with the companies it covers. The firm makes a market in Tenet's securities and currently owns at least 1% of the company's common stock.

Flurry of News

So far, this year has brought a flurry of news from the company.

In recent months, for example, Tenet has announced a number of regional management changes and the sale of one of its "core" 69 hospitals. The Tenet Shareholder Committee, a group long critical of company management, offered a mixed review of those actions.

The group questioned two recent promotions, in particular, while expressing some hope for even more asset sales going forward.

Last month, Tenet placed the long-time head of its troubled Florida region in charge of operations development for the entire company. In addition, the company named the CEO of its devastated Memorial Medical Center in New Orleans -- where dozens of patients died during Hurricane Katrina -- the new vice president of its New Orleans regional health network.

Tenet has pledged to remain in New Orleans, despite the city's uncertain future, although the company recently exited hurricane-hit Biloxi, Miss., by selling its only hospital in that state. The Tenet Shareholder Committee voiced some relief about the latter decision, at least.

"News of the Mississippi sale comes to us as a welcome sign that perhaps Tenet's core-group strategy is no longer locked in stone," the committee announced on its Web site last month. "Tenet should now re-evaluate all the bleeding hospitals in the core group. Swift action, as opposed to wishful thinking, will save shareholder dollars and leave Tenet with a viable group of hospitals."

The committee's chairman has expressed strong interest in buying one of the company's struggling hospitals -- which he founded in Florida -- for himself.

'Splitter Physicians'

In the meantime, Tenet has been busy naming some new hospital CEOs.

For example, Tenet recently decided to make Drew Kahn the permanent CEO of the company's Houston Northwest Medical Center. Kahn arrived as interim CEO last year, when the hospital found itself losing patient referrals to competing facilities in the area.

Last summer, Houston physicians told


that they believed the hospital -- always prized by its previous owners -- had gone seriously downhill under the Tenet umbrella. They were hoping a new local CEO would prove more responsive to their needs.

Tenet has now said that the company chose Kahn, in part, because he "has developed and nurtured relationships with physicians in the local community." Meanwhile, the company has laid out plans to seek more partnerships with doctors, in general, as it follows HCA in focusing on lucrative outpatient opportunities.

Still, Skolnick wonders if Tenet can win back so-called splitter physicians -- who have favored other hospitals -- in the end.

"That inertia is very difficult to overcome," she said. And "the industry scuttlebutt is that they don't like being called 'splitter doctors,' either. Just because they make that decision (to send patients elsewhere) doesn't mean that Tenet needs to call them bad names. ... But no matter what Tenet does, it just can't seem to strike the right chord with the doctors."