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Tenet Tanks Despite Progress

Shares are pulled down in a marketwide selloff.

Tenet

(THC) - Get Tenet Healthcare Corporation Report

has made some progress in its uphill battle for recovery.

The ailing hospital chain continues to bleed profusely -- suffering a $386 million loss in the fourth quarter alone -- but still looks stronger than it once did.

Fourth-quarter revenue climbed 2.6% to $2.18 billion, actually topping Wall Street expectations, as patient admissions finally showed some signs of stabilization. Excluding special items, such as a big impairment charge for underperforming hospitals, the company posted a rise in operating income as well. Operating profits jumped 35 percent to $58 million, whereas analysts had been bracing for another loss instead.

Notably, Tenet saw patient admissions fall by less than 1% -- a clear improvement over recent quarters -- despite ongoing company-specific and industrywide challenges.

"That's probably a victory," says Sheryl Skolnick, an executive vice president of CRT Capital Group who has no position in the stock. "I think the Street was expecting a real disaster, with volumes down 4% to 5%, and they didn't get that. ... It could have been a whole lot worse."

Even so, Tenet took a hit on a bloody day for the market overall. The company's stock fell 3.3% to $7.25 early Tuesday morning.

Skolnick, a former Tenet bear, remains optimistic nonetheless. She believes that investors could see Tenet's stock reach $9.50 a share over the next two years, if they have the patience -- and the stomach -- to weather the company's ongoing fight for its health.

Still, investors keep on waiting longer than they expect for that relief.

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Nearly five years into its recovery process, Tenet has -- once again -- warned of a slow mend ahead. Notably, the company now expects its pretax profits to fall into the lower half of the range it promised just last summer. Moreover, the company needs patient admissions to rise and bad debt expense to remain stable to hit its targets.

"The company believes this outlook for its earnings potential is achievable," Tenet said Tuesday, "but also cautions investors that there are a number of factors ... which could prevent this level of financial performance from occurring."

Investors must digest some mixed results in the meantime. On a sweet note, Tenet actually saw volumes climb in October and November before a tough December wiped out those gains. Several regions, including once-challenged California, fared well during the period. But two major markets, Florida and Texas, suffered slowdowns.

Those two markets, in particular, are burdened with high numbers of patients who lack adequate health insurance and struggle to pay their bills. Overall, however, Tenet's bad-debt problem eased in the latest quarter. With help from some one-time items, the company's bad-debt expense fell 16% to $124 million -- or 5.7% of revenue -- during the recent period.

Unfortunately, however, commercial admissions declined in the quarter as well. Although total managed care admissions -- including Medicare and Medicaid cases -- posted gains, lucrative commercial volumes dropped by 3.6% in the recent quarter. The company continues to lose well-insured patients to competitors, even as it upgrades cash-starved facilities in an effort to win some of that choice business back.

To its credit, Tenet has managed to improve its dismal profit margins in the meantime. During the fourth quarter, the company generated $153 million in adjusted earnings before interest, taxes, depreciation and amortization. That resulted in an EBITDA margin of 7% -- a notable improvement over the 5.8% EBITDA margin reported one year ago.

Still, Tenet has a long way to go before it finally hits the double-digit EBITDA margins that investors have anticipated for so long. Losing patients, especially those with commercial health insurance, only stiffens that challenge.

But Skolnick, for one, remains optimistic.

"Fundamentally, they're not changing their guidance," she insists. "They are pushing the turnover out for a year, saying that it will take longer and not be as strong as they had hoped.

"But that's fine," she concludes. "That's exactly what I had been expecting."