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Triad Heads for Triage

Some wonder how badly the hospital sector aches.


(TRI) - Get Thomson Reuters Corporation Report

did a lousy job of kicking off the hospital earnings season.

Normally, industry leader


(HCA) - Get HCA Healthcare Inc Report

-- long the bellwether of the group -- handles those duties. But HCA is busy going private and has yet to announce when it will share its final earnings report with the public. Moreover, by disclosing some pre-deal numbers in its regulatory filings, HCA has already revealed just how tough the hospital business has become.

Now, Triad has made things look even worse.

Of course, Triad has never been very good at forecasting how much unpaid hospital bills will hurt the company's results. And, to its credit, Triad itself has warned about the volatility of bad debt expense and the corresponding threat to its stock.

That said, however, Triad faces a shortfall that looks extreme by any measure. Specifically, the company said that third-quarter earnings will probably total just 46 cents or 47 cents a share -- nearly 30% shy of the consensus estimate. The company withdrew its future guidance as well.

It blamed rising bad-debt expense for the disappointment.

Triad has seen its collection rate on historic self-pay receivables drop from 38% to 35%, requiring yet another increase in its reserves for doubtful accounts. The company has also seen its current self-pay receivables rise so much that they have pushed up its third-quarter bad-debt expense beyond even bearish expectations.

Apparently, patients with limited insurance coverage -- and not just those who lack coverage altogether -- have caused the increased pain.

While Triad itself offered few details about the shortfall, Deutsche Bank analyst Darren Lehrich attempted to provide some color. Notably, Lehrich determined, Triad spent more money reserving for unpaid co-payments and deductibles than it did for totally uninsured cases.

"Triad's miss is confirmation of a continuing negative secular trend of higher insured cost sharing and still-rapid uninsured accounts receivable growth," Lehrich wrote on Monday. Moreover, "collection rates in both categories deteriorated in the look-back period."

Lehrich nevertheless continues to recommend buying Triad's stock because he views the shares as undervalued. His firm owns at least 1% of the stock itself and has received non-investment banking compensation from the company over the past year.

TheStreet Recommends

The market expressed far less faith in Triad, however. Investors pushed the company's stock down 8.6% to $38.40 in heavy trading Tuesday.

Other hospital companies, still preparing quarterly results of their own, took some hits as well.

Universal Health Services

(UHS) - Get Universal Health Services, Inc. Class B Report

spiraled 5.2% to $54.35.



dropped 3% to $33.46. And

Health Management Associates


slid 1.8% to $20.36.

Bearish Calls

BMO Capital Markets analyst Erik Chiprich downgraded Triad's stock from outperform to market perform shortly after the company's warning.

But Sheryl Skolnick, senior vice president of CRT Capital Group, had felt uneasy about the stock already. Notably -- even before the warning -- Skolnick had lost faith in management's guidance and, in turn, her own ability to publish accurate forecasts based on the numbers given to her.

Skolnick's misgivings proved well-founded, with Triad reporting a shortfall beyond her imagination. She dwelled on the increase in reserves -- even though it could be viewed as one-time in nature -- especially hard.

In the second quarter of 2003, "Triad took an additional reserve of $15 million (11 cents per share) to cover future deterioration in accounts receivables collections," Skolnick noted. "The issue is important because we believe that investors saw that $15 million as a cushion against precisely the negative event that Triad announced last night."

She now wonders what happened to that original $15 million -- which, she says, remained untouched just one quarter ago.

Skolnick also wonders whether Triad's dismal third-quarter results reflect company-specific problems or industrywide trends. Because Triad limited its comments, she cannot say for sure.

But Skolnick believes that LifePoint, at least, could be spared. She says that her discussions with the company's CFO indicate that collections have actually been going better than expected.

Skolnick sees other hospital companies as more vulnerable, however. She highlights HMA -- which operates in some of the same rough markets as HCA -- in particular.

"Given the geographic overlap of HCA and HMA, the latter could also have a rough time with collection rates this quarter, worsened by its steep gross charge increases," Skolnick wrote on Tuesday. "If HMA doesn't report higher bad-debt expense this quarter, it is only because of the mismatch between the timing of its bad-debt expense and revenue. ... Unlike many its peers, we do not believe that HMA trues up reserves to account for current period collection rates."

Skolnick has fair value ratings on both Triad and LifePoint. She has a sell recommendation on HMA. She owns none of the stocks herself, and her firm has no investment banking ties to the companies.

Bright Side

Meanwhile, CIBC World Markets analyst Charles Lynch has decided to look on the bright side.

Yes, Triad missed his third-quarter estimates and could soon release new guidance that's meaningfully below the market's previous expectations. However, he notes, the company has been investing heavily in new joint-venture operations that could start paying off for patient investors next year. Or, he suggests, the company could attract a leveraged buyout offer that might reward investors even sooner.

"Triad has been candid regarding its discussions with private-equity entities about an HCA-style privatization," Lynch wrote on Tuesday. "Triad management noted that it has had extensive dialogue with numerous potential investors and would be open to a similar deal structure if it could be made to conform with the company's continued interest in join-venture investments to further expand its portfolio."

Lynch has a sector outperform rating on Triad's stock. His firm seeks to do business with the companies it covers.

"We believe our updated price target of $48," Lynch adds, "could represent a realistic starting point for take-private conversations."