Tenet Takes It Higher

Shares rise on a turnaround quarter.
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OKLAHOMA CITY -- Finally, ailing

Tenet

(THC) - Get Report

has shown some signs of life.

With its third-quarter results, which actually beat Wall Street expectations, Tenet may have surprised some doubters who had left the hospital chain for dead. Quite simply, the company is losing fewer patients -- and charging higher prices -- than it once did. Shares rose 23% as a result.

Tenet's third-quarter results clearly reflect those improving trends. Revenue jumped a healthy 7% to $2.23 billion, topping Wall Street's $2.18 billion target, despite a modest decline in same-hospital admissions. Meanwhile, Tenet posted a strong 54% jump in earnings before interest, taxes, depreciation and amortization. The company's losses narrowed as well, falling by one-third to $59 million, with negative earnings per share of 6 cents coming in a penny better than expectations.

Moreover, Tenet expressed strong confidence that its momentum will continue. The company reiterated full-year profit targets that previously looked aggressive to some.

After years of government investigations -- ended by a global settlement that has, so far, failed to spark an expected turnaround -- Tenet investors finally saw reason for hope. CRT Capital Group analyst Sheryl Skolnick, a rare Tenet bull, rushed to applaud the company's progress.

"While too early to declare any sort of victory, it is not too early to say that 3Q07 marks the first quarter with tangible evidence of a turnaround since the settlement in late June 2006," Skolnick wrote on Tuesday. "We expect the strong revenue and cost control results for 3Q07 to carry through the next two to three quarters at least, providing a foundation for future operating improvements.

"For all of these reasons, we strongly reiterate our buy rating" on Tenet's stocks and bonds.

In contrast, Credit Suisse analyst Ken Weakley declared that "recovery

is nowhere in sight." Weakly, a longtime Tenet bear who helped trigger the company's downfall, in fact spotted a number of weak spots in the company's latest report.

Specifically, Weakley noted that admissions remain soft despite massive investments in capital improvements. Furthermore, he pointed out that Tenet continues to lose money and burn through cash as it chases its elusive turnaround.

Weakley has an under-perform rating and a Street-low $2 price target on Tenet's shares. His firm has investment banking ties to the company.

JPMorgan analyst Andreas Dirnagl still views Tenet as a chronically sick company as well. For starters, Dirnagl insisted that Tenet's improving metrics benefited from "easy year-over-year comparisons on virtually every front." Even so, he added, the company still reported lower admissions and an "alarming" increase in uninsured patients who do not pay their bills.

"While some may view 3Q results as the early stages of a turnaround, we would be cautious," Dirnagl warned on Tuesday. "Given the long and bumpy road the company must travel to achieve profitability, we would again advise investors to focus on other healthcare services names that have better visibility, lower risks and more attractive valuations."

Dirnagl has an underweight rating on Tenet's stock. His firm counts Tenet among its present clients and hopes to secure investment banking business from the company in the future.