Triad Numbers Sizzle

The hospital chain posts solid results, but some observers still worry about the effect of uninsured patients.
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(TRI) - Get Report

is sporting a healthy glow.

The Texas-based hospital chain on Monday reversed a year-ago loss with second-quarter results that topped Wall Street expectations. Revenue jumped 6% to $1.2 billion, while operating profits, excluding special items, came in at $58.3 million, or 71 cents a share. Analysts, on average, were looking for second-quarter earnings of just 66 cents.

After beating Street forecasts for the first two quarters of the year, Triad raised its 2005 guidance to between $2.82 and $2.90 a share from the previous $2.73-$2.83 range. Analysts were already looking for full-year profits of $2.87 even before that move.

Triad's stock inched up 11 cents to $50.51 after the update.


Avondale analyst David Dempsey was recommending the stock, highlighting it as one of his firm's best investment ideas, even before this week's quarterly report. Moreover, he was looking for Triad to simply match -- rather than top -- Wall Street expectations.

Still, UBS analyst Kenneth Weakley maintained his cautious tone when reviewing Triad's results. For example, he called the company's same-hospital metrics -- including admission growth of 1% -- "solid but not spectacular." In addition, he pointed to uncompensated care as a lingering problem for the company. That metric, which includes both charity care and bad debt from the uninsured, rose to 11% of revenue in the latest quarter.

"It seems that Street expectations for linear improvement in bad debt were misplaced," noted Weakley, who has a neutral rating on Triad's shares.

Peter Young, a business consultant at HealthCare Strategic Issues, found Triad's bad-debt number especially telling. He pointed out that Triad actually generates less revenue from inpatient services -- which tend to attract more of the uninsured -- than it does from the outpatient services that are often elective and more lucrative. Nevertheless, he noted, this "payer mix success story" has failed to shield Triad from the pressing bad-debt issue.

"When one considers by far and away the majority of Triad's bad debt would be associated with the inpatient segment of the business," Young said, "the continuation of bad debt at current levels highlights an industry problem."


Health Management Associates


could become the next hospital chain to report high levels of uncompensated care. To be fair, Bear Stearns analyst Jason Gurda is looking for HMA to post a slight improvement it its bad-debt expense when it issues quarterly results on Tuesday. However, he points to an accounting procedure -- with the company classifying more accounts as charity care instead of bad-debt expense -- as a reason for that improvement.

Morgan Stanley analyst Gary Lieberman will be focusing on that crucial metric as well.

"HMA's uncompensated care (charity care plus bad debt) did tick down in F2Q05 for the first time in five quarters," Lieberman acknowledged. But "we would like to see continued stabilization in self-pay metrics, as HMA is one of the few companies we cover for which charity care continues to increase."

For his part, Gurda offers a couple of company-specific reasons for this problem. He highlights both HMA's heavy presence in Florida -- with its growing crowd of undocumented and uninsured workers -- and its overall focus on rural markets that often rely on just one hospital to treat all local patients.

Still, Gurda is looking for HMA to meet quarterly profit expectations of 39 cents a share and continues to maintain a market-weight rating on the stock. Meanwhile, Lieberman feels even more optimistic about the company. He believes that HMA will top the consensus estimate by a penny because of a rebound in same-store pricing growth.

"The company primarily attributed the lackluster 0.5% revenue per adjusted admission growth rate in F2Q05 to flu and a decline in the managed care length of stay," explained Lieberman, who has an overweight rating on HMA's stock. "With Medicare rates in the 4% range and managed care running well above that, we would expect growth to pick up markedly absent those two factors."

Shares of HMA rose 1.3% to $24.73 ahead of Tuesday's update.

Three other hospital companies --


(UHS) - Get Report



(CYH) - Get Report




-- are slated to issue quarterly results this week as well. Dempsey is looking for a 1-cent miss from Universal, a company that last quarter beat expectations by some 22 cents and by now has a reputation for surprises. Meanwhile, Dempsey expects Community to post in-line earnings of 45 cents a share and LifePoint to top the consensus estimate of 59 cents by two pennies.

Universal and LifePoint report earnings on Wednesday, with Community following on Thursday.

Dempsey has a market-perform rating on Universal and outperform ratings on both Community and LifePoint. Like Triad, LifePoint is an Avondale "focus list" stock.

Still, LifePoint missed out on Monday's hospital sector rally. The stock was down 20 cents to $47.80 Monday morning.