Universal Health Gets Hammered

The stock plunges after a big earnings miss. Plus, LifePoint shows some vital signs.
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Universal Health

(UHS) - Get Report

has landed squarely back in the sick ward.

The company -- never known for its powers of self-diagnosis -- has once again reported wildly surprising results, this time delivering a big miss instead of the huge upside that reassured investors just one quarter ago. Competitive pressures in a crucial south Texas market and a surge in bad-debt expense from the uninsured resurfaced to cause the pain.

Several analysts finally gave up on a cure for the company and downgraded the stock on Thursday.

Oppenheimer analyst Joseph Chiarelli cut the stock from buy to neutral because of Universal's "low earnings visibility" after the company followed up a strong first quarter -- when it topped the consensus estimate by a whopping 22 cents -- with a stunning 11-cent miss this time around. Counting gains from a big asset sale in France, Universal actually tripled second-quarter profits to $147 million, or $2.34 a share. Excluding those gains, however, the company saw its second-quarter profit fall by 16% to $38.2 million, or 64 cents a share, in its third disappointment over the past year. Revenue of $991 million, while up 9% from a year ago, also fell short of Wall Street expectations.

Prudential analyst David Shove essentially warned investors to run.

"Last quarter, Universal Health Services posted good results due to a period of relative calm, where old problems remained stable and no new ones were reported," reminded Shove, when lowering his recommendation from neutral weight to underweight on Thursday. "This quarter, Universal Health Services' temporary stability is utterly shattered. ... We are downgrading Universal Health Services based on increasingly unstable acute-care operations."

Shares of Universal plummeted 8.3% to a three-month low of $53.07 following the dismal update.

Mixed Diagnosis

To be fair, Merrill Lynch analyst A.J. Rice did spot some strengths in Universal's report even while cutting his recommendation on the stock from buy to neutral.

Despite problems in one of its largest markets, he said, the company still managed to increase same-facility admissions by a "very respectable" 2.7%. Moreover, he added, same-facility revenue jumped an even higher 6.6%. Finally, he noted, the company's behavioral health facilities turned in yet another solid quarter.

Indeed, Universal's behavioral unit saw admissions and revenue jump by 7.6% and 9.4% respectively. But that strength failed to offset clear weaknesses in the company's acute-care business.

For its part, Universal blamed "continued intense competition from a physician-owned hospital" in its McAllen/Edinburg, Texas, market for an overall drop in its net income and operating margins. However, it also highlighted a particularly worrisome problem -- a spike in bad debt from the uninsured -- at its acute-care hospitals in general.

During the latest quarter, Rice calculated, Universal saw bad-debt expense for its acute-care hospitals rocket from 9.7% to 11.3% of revenue.

Shove noticed that jump as well.

"Admissions without money don't help," Shove pointed out. And "since the problem appears to be systemwide, bad-debt expense could trend at a new

higher range" for the rest of the year.

If so, Universal could struggle to hit its targets. Rice, for one, believes the company needs more quarters like the first -- with signs of a recovery -- instead of like the second, in order to reach its goal.

We are "maintaining estimates," he concluded, "but

are less confident in

the company's ability to reach them."

Healthy Checkup

In stark contrast,



looks downright healthy to some.

To be sure, the company's second-quarter results were no easier to read than a physician's scribbled prescription, because of a slew of special merger-related items. Indeed, Fulcrum analyst Sheryl Skolnick essentially admitted as much after wading through the report on her way to offering a bright prognosis for the company in the end.

"LifePoint reported results that were, we must say, about as clear as mud," wrote Skolnick, who has a buy rating on the company's shares. But "upon closer inspection and a conversation with management that clarified several items, we are sure that results exceeded our expectations of 60 cents per diluted share by 5 cents and consensus by 6."

Skolnick then went on to explain much of LifePoint's revenue miss as well. The company reported second-quarter revenue of $468 million that, while up 96% with help from its Province acquisition, still fell short of the $487 million consensus estimate. But, Skolnick says, revenue would have come in at $481 million -- much closer to expectations -- had the company included the results of three hospitals it is now attempting to sell.

Meanwhile, Skolnick highlighted some more obvious strengths. For example, she said, LifePoint's stand-alone same-hospital admissions rose 3.2% in the latest quarter. Moreover, she indicated, only a small portion of that increase came from uninsured patients. Thus, bad-debt expense came in below her expectations.

Skolnick pointed to several other metrics -- including strong cash flow and a drop in certain expenses -- as strong points as well.

"The metrics here tell the tale of a company that didn't let operations slip even when going on an unprecedented acquisition binge," Skolnick concluded. "We think that some may be forced to admit that LifePoint can run hospitals, even if it can't produce a simple income statement."

Still, at least one analyst suggested that the lack of clear financials could cost the company on Thursday.

"While the one-time events were not unexpected," wrote UBS analyst Kenneth Weakley, "the difficulty of determining the underlying earnings power of the quarter could result in some sloppy trading on Thursday morning."

Weakley, who has a reduce rating on LifePoint's shares, proved to be right. The stock fetched everything from $46.88 to $48.35 a share before settling down around $47.28 -- with a drop of less than 1% -- on Thursday afternoon.