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Tenet Healthcare Shares Punished

The company gets a little murkier on 2009.


Tenet Healthcare's

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journey to the recovery room just got longer.

The Dallas-based hospital chain continued to make some progress in the quarter, swinging to a profit from a year-ago loss, but the company still fell short of Wall Street targets. It also scaled back its outlook for the full year and dropped a key promise for 2009, when it had hoped to prove its comeback by generating $1 billion in earnings before interest, taxes, depreciation and amortization.

While Tenet continues to attract more patients to its hospitals, with admissions now rising for the fourth quarter in a row, fewer of those patients enjoy generous health insurance coverage in the tough economy.

Shares of Tenet sunk more than 25% in recent trading to $3.06.

Other hospital stocks lost some ground as well.

Community Health Systems

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, the largest and strongest of the group, slipped 1% to $20.14.

Universal Health Services

(UHS) - Get Universal Health Services Inc. Report

, a diversified hospital company with a strong presence in the behavioral health space, fell 2.3% to $43.18. Meanwhile, rural hospital operator


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tumbled 3.1% to $24.

Tenet said third-quarter revenue came in at $2.14 billion, up 5.2% from a year ago but still shy of the $2.21 billion consensus estimate. Similarly, net income soared to $104 million -- a clear improvement over the $59 million loss posted last year -- but included hefty gains from investments and other one-time benefits. Without that help, the company would have posted an operating loss of $32 million instead.

Excluding special items, Tenet lost 6 cents a share. Analysts, on average, were expecting the company to lose just half that much.

Chances are, they also expected Tenet to repeat its longstanding pledge to generate $1 billion in EBITDA next year. Instead, the company further trimmed its EBITDA outlook for 2008, which now rests at $700 million to $750 million, and offered no details about its 2009 outlook at all. The company now plans to issue formal 2009 guidance when it releases its fourth-quarter results in February of next year.

Sheryl Skolnick, senior vice president of CRT Capital, had clearly hoped for better. Before Tuesday's devastating update, in fact, Skolnick felt fairly confident that Tenet could approach -- and potentially even meet -- its crucial $1 billion EBITDA target next year.

"We were wrong on the company's ability to drive operating leverage to the EBITDA line on higher volumes this quarter because the mix of patients deteriorated to lower-margin patients," Skolnick admitted after reviewing the company's results. Now, "we believe that Tenet needs to undertake another review of its cost structure to ensure that it is as efficient as it can possibly be.

"Even though we believe that productivity improved in 3Q08 versus 3Q07, other cost increases (supplies, bad debt and overhead) ate up that improvement," she said, "and it should not be the case that Tenet can only get margin leverage if its mix of patients shifts to its highest-margin mix."

Although Skolnick has maintained her buy recommendation on Tenet's stock, she has placed her estimates for the company under review. Her firm makes a market in the company's securities.

Tenet did report some good news for the quarter. The company continued to grow same-hospital admissions, which rose 1.7% in the period, and finally increased same-hospital outpatient admissions for the first time in five years.

Still, Tenet attracted fewer of the well-insured patients that tend to matter most. Same-hospital admissions of commercially insured patients fell by 3.4% in the latest quarter, with outpatient visits by those patients slipping a bit as well.

Meanwhile, more patients who lack health insurance -- and often fail to pay their bills -- sought treatment at Tenet's hospitals. Uninsured admissions grew by 4.9% in the third quarter, easily outpacing the growth in same-hospital admissions overall.

Tenet found itself reserving more money for doubtful accounts as a result.

Tenet, however, tried to look on the bright side. The company celebrated its ongoing progress, while acknowledging its recent setbacks, and once again hinted at better days ahead.

"Growth in commercial admissions lagged, and we absorbed an increase in bad-debt expense," Tenet CEO Trevor Fetter admitted on Tuesday. Still, "while a softening economy may have constrained the robust momentum evident earlier in the year, we are confident we are on the right track, and we remain committed to our growth strategies.".