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Tenet Critic Stands His Ground

Analyst Gary Taylor sees a selloff even as rivals upgrade the stock.

Through a series of competitor upgrades, including a new one earlier this month, at least one Wall Street expert has stood firmly behind his sell recommendation on


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Banc of America analyst Gary Taylor gave up on Tenet more than two years ago. And, if anything, Taylor has grown even more bearish -- with a Street-low $5 target price on Tenet's stock -- over time.

"We're sticking to that," Taylor recently told

after another analyst

issued a target price that was more than double his own. "We don't believe the company is going to be able to materially execute an operational turnaround."

By now, Taylor has watched several other firms choose the opposite side of that bet. Those firms have been counting on Tenet to settle its problems with the government, restore its margins and move on.

In contrast, Taylor feels that Tenet's hospitals have grown so capital-hungry -- and its reputation so tainted -- that the company can no longer recover on its own. Thus he sees Tenet selling itself in pieces and, after paying off massive liabilities, leaving stockholders with no more than $5 a share.

"That will probably take two to three years" to play out, he says. "But that's our 12-month target price because we think the market will be led to the same conclusion by then."

In the meantime, Tenet's stock slipped 2 cents Monday to $8.03.

Estimated Value

Taylor did his math before reaching a breakup value for the company.

He found that Tenet had realized just $179,000 per bed for the 29 hospitals the company has sold already. He pegged the average price for hospital beds, in general, at $320,000 in recent years. And he included the highest price -- $544,000 paid by


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for a Midwestern hospital network -- in that total.

"Hospital valuations were 50% higher then," he adds. "I think the market now believes that HCA overpaid."

Nevertheless, Taylor has blended that $544,000 high and the $320,000 average to reach a price that Tenet -- which has been getting far less -- might receive for its remaining hospitals. He came up with $400,000 a bed in the end.

Taylor believes the proceeds should be enough to pay a $1.5 billion government fine, cover the company's existing multibillion-dollar debt load and then leave stockholders with his target price of $5 a share.

Meanwhile, Taylor continues to write off any real chance of a recovery. He offers two major reasons.

For one thing, he says, Tenet has fallen seriously behind on capital improvements even as nonprofit hospitals pour huge sums of money into competing facilities of their own. And capital, he adds, is "the only competitive edge" in the hospital business. For another, he goes on to suggest, Tenet has found itself operating with a serious handicap -- its tattered reputation -- in the meantime.

The solution?

"You need new ownership," Taylor says. "You need a new name. You need to hang a new shingle on the door."

Eternal Optimists

Others have repeatedly hoped for better.

Within a few months of his late-2003 downgrade, for example, Taylor saw Lehman Brothers name Tenet as its top pick in the hospital space. The stock went up to $18 -- a price it has never seen again -- before crashing on company guidance that essentially matched Taylor's own.

Quite simply, Tenet told the market in early 2004 that the company would not be making any money that year at all. Several analysts promptly threw in the towel.

But as the year wore on, Oppenheimer and then Citigroup (which had just floated bonds for Tenet) stepped forward with buy recommendations on the stock. The shares promptly jumped, closing above $13 for the last time to date.

Most recently, Credit Suisse analyst Glen Santangelo -- a newcomer to hospital coverage -- upgraded Tenet to buy and established an $11 target price on the stock. The stock, in turn, recovered from a recent 12-year low of $6.89 a share with a bounce past $8.

Offering familiar arguments, Santangelo has predicted that Tenet will soon ink a government settlement and then go on to improve its margins to a reasonable level. Tenet is a Credit Suisse banking client.

With Tenet now under investigation for more than three years, even Taylor himself feels that a settlement could be near. But he recommends selling the stock nonetheless.

"Obviously, the stock will go up that day," Taylor says. "But then there are no more catalysts."

Instead, he feels, Tenet will be left to "block and tackle" in a tough game it is already losing. And he sees no good reason to bet on the underdog now.

"We think we've had a really good call on Tenet for two or three years now," Taylor says. "And we've been very consistent ever since we went permanently negative on the whole Tenet story."