has just suffered a relapse.
The same bad-debt problem that hurt third-quarter results -- and hammered the company's shares -- is expected to eat away at earnings for at least another year. After monitoring its vital signs for the past six weeks, Triad has darkened its outlook for both the fourth quarter and 2004. The company, which plans to formalize its prognosis later this month, has warned in the meantime that it's already headed toward the low end of analysts' earnings expectations. It blamed a crippling bad-debt problem that has only worsened since it was first diagnosed in October.
The company said on Monday that consensus estimates for both the fourth quarter and 2004 are now "in the upper end of the company's own preliminary range." Prior to Monday's update, analysts were expecting the company to deliver profits of 48 cents a share for the quarter and $2.35 a share for the year.
The problem isn't Triad's alone, and it's not going away anytime soon, judging by a look at the company's peers. Triad believes that bad debt will continue to hurt its performance in coming periods, and its two larger peers --
-- are also weathering bad-debt problems, due to a weakened economy that has led many companies to cut health insurance benefits for their employees. Hospitals typically collect just a fraction of the amount owed by under- or uninsured patients.
The provision for bad debt "is subject to further change prior to the company's release of earnings guidance, in the event collection performance changes measurably and significantly," Triad stated. "Even after the company issues earnings guidance, the company expects this expense will continue to be subject to change -- possibly positive or negative -- throughout 2004."
Triad blindsided analysts less than two months ago by
taking a huge bad-debt charge and warning that its provision for doubtful accounts would rise to between 9% and 9.5% of net revenue going forward. It is now expecting bad debt to total an even larger 10% of net revenue through 2004.
Triad shares, which plunged 17% on October's warning, slid 4.1% to $31.19 on Monday's update. At least one analyst, who reiterated his "long-held cautious investment thesis" on Triad, indicated that Wall Street had been too optimistic about the company's outlook.
"We believe that the Street had come to expect that, despite the bad debt problems, Triad's ability to reduce costs could allow for still strong results in 2004," wrote UBS analyst Kenneth Weakley, who has a reduce rating on Triad's stock. "Today's news should, however, throw some cold water on that theory."
Triad's update came just hours after other Wall Street analysts issued reassuring reports on the company. Early on Monday, Lehman Brothers analyst Adam Feinstein predicted that Triad would offer no unpleasant surprises -- and even leave room for upside potential -- when it issued fresh guidance this month.
"We believe that Triad will suggest that bad-debt expense trends have not accelerated, implying that the magnitude of its recent increase in reserves was likely conservative," wrote Feinstein, who has an equal weight rating on the stock. "We believe Triad will provide guidance consistent with our estimates."
To be fair, Feinstein's estimates were already lower than the consensus on Wall Street. But Merrill Lynch analyst A.J. Rice found himself cutting his own fourth-quarter estimates shortly after raising his price target on Triad -- and several other hospital names -- just ahead of his firm's health care conference this week. Rice remained bullish on Triad even after Monday's news.
"The increases in bad-debt expense has led to a less precise earnings outlook for the coming few quarters," confessed Rice, who nevertheless maintained his buy recommendation on the stock. But "we believe those investors that can look past the short-term volatility created by fluctuations in bad-debt expense will be well rewarded."
In the meantime, Rice pointed to improvements in at least one important vital sign at the company. Triad reported that same-hospital admissions had surged 4% -- up from 2.9% in the third quarter -- during the first two months of the current period.
But Weakley, for one, was not impressed.
"The Street may focus on these statistics -- especially given the recent commentary on the strong flu this year -- as a sign that admissions have indeed turned the corner," Weakley wrote. "Such optimism, we believe, will prove optimistic."
Weakley instead remained guarded about the company's condition. He warned that Triad "does not seem to take the rising bad-debt costs fully into consideration" when calculating its latest estimates. He also cautioned that Triad's business strategy, in general, could be a risky one.
"Its deal-driven top-line growth focus could prove to be too aggressive given management's inability, thus far, to generate improved results out of its core assets," he wrote. "The managerial effort required to execute such an aggressive growth story is extensive, and in the currently difficult environment ... we believe that a focus on core operations is more important for creating shareholder value."
So far, the ratings agencies have been more generous. Although they point to future challenges, they also compliment the company's past performance. Moody's, for example, says that "Triad's operating trends have been generally positive since its inception."
The company is generally upbeat as well. It has pledged to deliver "long-term annual EPS growth in at least the mid-teens percent range" after 2004. In the meantime, it tends to view current challenges -- particularly bad debt -- as temporary setbacks.
"We remain optimistic about the company's long-term financial performance," Triad CEO James Shelton said in October. "We expect to adapt to the new environment by adjusting other elements of our operations in order to overcome the collection challenge, meet our financial objectives and continue accomplishing our mission of providing quality health care to the communities we serve."
Still, even Moody's -- which "believes that the company will be able to sustain its performance" -- offers words of caution.
"There will likely be more limited opportunities to improve margins going forward, in particular for existing facilities, given what the company has already accomplished," Moody's wrote after the company's first bad-debt warning. "Going forward ... Moody's is concerned that it may become more challenging for the company to meet its performance goals."