Triad Hits Targets

But some wonder about lingering bad-debt questions.
Publish date:


(TRI) - Get Report

has reported some mixed vital signs.

For the most part, the company posted strong first-quarter results that pushed earnings ahead of Wall Street expectations. Operating profits of 82 cents a share, while down significantly from a year ago due to the absence of a gain, came in 8 cents ahead of the consensus estimate.

Moreover, Triad saw same-hospital admissions jump 2.5%, lifting first-quarter revenue 9.6% to match the consensus estimate of $1.21 billion. Excluding the impact of new pricing discounts for the uninsured, revenue would have risen an even stronger 9.8%.

Those discounts helped lower the company's first-quarter bad-debt expense from 10.2% of quarterly revenue to 9.3%. However, they still left the company providing more uncompensated care than some had expected. Without the discounts, Triad's provision for doubtful accounts would have totaled 10.8% of revenue -- more than some, including the company itself, had targeted. Triad was looking for that metric to come in at 10.2% to 10.7% instead. Still, it portrayed the target as a moving one.

"Triad believes that the provision will likely fluctuate from quarter to quarter during 2005, even possibly outside of this range," the company explained on Monday. "Triad also believes that the annual range itself will be subject to change, possibly positive or negative, based on evolving business conditions and the effectiveness of the company actions in response, and this may impact 2005 EPS."

For now, however, Triad has left its full-year guidance intact. The company's stock jumped 2.5% to $51.42 on Monday in expectation of good news.

High Hopes

Some experts were clearly counting on strong results from the company. Indeed, Ryan Beck analyst Robert Mains on Monday reiterated his outperform rating on Triad because of his belief that the company could beat Wall Street expectations. He pointed to three different factors -- profits from the busy flu season, employment-related improvement in bad debts and sequential growth in patient volumes -- as potential drivers of an upside surprise.

Bear Sterns analyst Jason Gurda was looking for healthy first-quarter profits as well. He suggested that Triad had "the potential to report a significantly stronger quarter" than some -- including himself -- had predicted, and then raise full-year guidance as well.

Still, Gurda expected mixed news overall. He predicted that patient admissions would actually dip because of difficult year-over-year comparisons. He also looked for revenue growth to slow dramatically, from a recent rate of 14% to just 4.3% in the latest quarter, as a result of divestitures and pricing discounts for the uninsured. Looking ahead, he also said that Triad's plans to replace two hospitals could leave the company short of cash-flow targets in the future.

In the meantime, he said, the company's bad-debt problem, fueled by growth in the uninsured population, is likely to continue.

"Based on comments from management and


(HCA) - Get Report

recent earnings release," he explained, "we do not expect a significant improvement in uninsured volume trends."

Still, Gurda figured that bad-debt expense would drop more than it did to 9% of revenue in the first quarter. But he also figured that most of that decline would come from discounts for the uninsured that could, in fact, lead to problems down the road.

Specifically, he noted that one non-Triad hospital, North Mississippi Medical Center, recently backed away from its own discount pricing because too many patients began flocking to the hospital in pursuit of free health care. Thus, he now worries that Triad could suffer from similar, if less dramatic, problems of its own.

"Although Triad's discount policy is more modest than NMMC's," he said, "we are somewhat concerned that it could cause uninsured patients to seek out Triad's hospitals."

Triad operates hospitals in several states with large uninsured populations. Indeed, the company is most heavily concentrated in Texas -- its home base -- which suffers from the nation's highest uninsured rate of all.

Banc of America analyst Gary Taylor sees a lingering problem for the group. He notes that the hospital stocks already sold off -- underperforming the broader market for the first time in weeks - when HCA recently fell short of the bad-debt improvement some had anticipated. He therefore believes that bad debt has yet to become a true "investable theme." Instead, he expects that other fundamentals, such as volume growth and margin leverage, will have to drive earnings higher.

Moreover, Taylor predicted this week that some companies would simply fare better than others. He pointed to

Universal Health

(UHS) - Get Report

as the player most likely to deliver "material" upside results. He figured that Triad would actually fall a penny shy of Wall Street expectations. And he warned that

Health Management Associates


, hurt by slow organic growth with only modest help from acquisitions, could disappoint.

Meanwhile, Gurda suggested that Triad, itself, could take a hit even if it did post solid numbers.

"With the stock up nearly 60% over the prior six months, we believe a modest bad-debt recovery and increased 2005 guidance

are already priced in," wrote Gurda, who has a peer perform rating on the stock. "We wouldn't be surprised to see some profit-taking after they report the quarter."