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Tenet Fan Takes Charge

The stock surges after an upgrade, but is the jump justified?

This week, a hospital analyst published a 43-page report explaining why

Tenet Healthcare

(THC) - Get Free Report

could finally be a good stock to buy.

In a nutshell, Credit Suisse analyst Glen Santangelo determined, Tenet has been sick long enough. After all, he wrote, the company has spent more than three years operating under a cloud of government scrutiny that has hurt its operations and punished its shares. Surely, he concluded, this will be the year that the company finally inks a global settlement and moves on.

But a competing analyst is unconvinced.

"I wish that, if the bulls were going to come up with something, they would come up with something new and interesting," says CRT Capital analyst Sheryl Skolnick, whose firm has no position in the stock. She has no rating on Tenet. "I wish they would say, 'Here is something fundamentally different that the company is doing that it wasn't doing before.' That is what I'm looking for."

Instead, Santangelo is among a group of hospital analysts who are now looking for a crucial jury verdict to pave the way for a global settlement of government claims against the company. Once the trial is resolved, Santangelo believes, Tenet will probably pay a big fine and then start funneling its resources into the capital improvements it needs to attract physicians and restore its patient volumes. He believes Tenet could go on to double its operating margins over the next few years.

But Peter Young, a business consultant at HealthCare Strategic Issues who has no position in the stock, considers Santangelo's forecast "irresponsible" in light of both company-specific and industrywide challenges.

"If there was only one assumption of a critical nature, that would be different," Young says. "But the report contains an astounding number of critical assumptions or caveats -- many of which are contrary to current hospital-industry experience."

Nevertheless, some investors bought into the analyst's argument. Tenet's stock, which hit a new 12-year low of $6.89 earlier this week, jumped 7.7% to close at $7.59 on Thursday.

One Sure Thing

Santangelo is clearly right about one thing.

A jury trial, meant to determine whether Tenet has been involved in criminal wrongdoing, must someday come to an end. Following an earlier mistrial, a San Diego jury has now spent months trying to determine whether a Tenet hospital illegally bribed physicians in return for patient referrals. The current jury is now into its fifth week of deliberations.

Santangelo sees a decision coming soon, followed by a global settlement with the Department of Justice as early as the first half of this year.

"The key question that comes to investors' minds is why the company is more likely to settle now, as opposed to in 2007 or 2008," Santangelo acknowledged, when upgrading Tenet from neutral to outperform on Thursday. "After all, many expected a settlement to be announced in 2005, which was clearly not the case. This time around, however, we think there are a number of reasons why the company is likely to announce a settlement in the near term."

For starters, Santangelo feels that the two parties were nearing a settlement until Hurricane Katrina crashed ashore last fall and shifted their attention to more pressing matters. Since then, he suggests, Tenet has probably helped its cause by recommitting itself to the devastated New Orleans market. Meanwhile, he notes, the government probe has now dragged on for more than three years without a single conviction against the company. And, he concludes, the government surely has no intention of putting the company out of business in the end.

Thus, Santangelo sees Tenet paying a stiff but affordable fine of $1 billion to $1.2 billion and then investing its remaining cash in the improvements necessary to repair its industry-low margins going forward. Credit Suisse provided Tenet with investment banking services over the past 12 months and expects to again over the next three months.

No Cure-All

But Skolnick, who doesn't own the stock, believes Tenet needs more than a jury decision to cure its problems.

She notes that the jury case could still end with another mistrial or, even worse, a conviction for the company. Only an acquittal, she says, will bring the case to a real end.

Moreover, she adds, even a victory for Tenet brings no guarantee of a global settlement with the government. She points out that a racketeering case in Florida -- and not just the trial in San Diego -- has no doubt been hindering negotiations.

Florida has accused Tenet of bilking Medicare at the expense of other hospitals in the state. It is hoping to make Tenet give any ill-gotten gains to non-Tenet hospitals that might have deserved the money instead.

"That's going to be either very difficult or extremely expensive to settle," Skolnick says. "There are many issues plaguing the settlement process. There are a lot of people who want Tenet's hide -- but don't necessarily have the same incentives -- and that's why this is taking this so long."

In the meantime, she says, Tenet continues to struggle in a tough industry environment. Patient volumes are low, she notes, and physician shortages -- particularly in Tenet's urban markets -- are very real. Moreover, she says, patients who do show up at hospitals often lack insurance. In addition, she adds, hospitals could soon face cutbacks from Medicare and Medicaid alike.

Skolnick points to several company-specific challenges as well. Notably, she says, the company still lacks a permanent CFO. In addition, she says, it has yet to bring its costs under control even after years of trying. Finally, she adds, it is "throwing buckets of money" at a New Orleans market that was only marginally profitable at its best.

Still, even Skolnick offers one morsel of hope. She points out that Tenet has not only repaired -- but actually improved -- its relationship with one of the nation's largest health insurers. Specifically, she says, the company has won accolades for its cardiac care from

UnitedHealth Group

(UNH) - Get Free Report


"If I saw an upgrade based on something like that (which could improve insured volumes), that could be a reason for a 'buy' rating. That," she says, "could be the beginning of something interesting."

But Skolnick sees something else for now.

"I see a fundamentally deteriorating asset base with an underlying stock price that goes up," she says. "And that is not a good thing for investors."