Tenet ( THC) remains in critical condition.

The ailing hospital chain announced Tuesday that special charges, mostly related to facilities it hopes to sell, will easily wipe out its meager first-quarter operating profit. The company expects to report a net loss of $117 million, or 25 cents a share, when it formally releases first-quarter results next week. Excluding special items, however, the company's 5-cent operating profit is considerably better than the break-even results Wall Street was expecting.

Still, Kenneth Weakley -- the UBS analyst who first exposed Tenet's problems -- dismissed the earnings surprise as "a modest ray of sunshine in an otherwise messy quarter." And Tenet itself warned investors against banking on continued upside.

"Winter is the busy season in certain of our markets, and we caution investors from extrapolating our results for this period," said CFO Stephen Farber. "Although we are optimistic that our results will improve over time, we reiterate our expectation of approximately break-even net income from continuing operations" this year.

Investors nevertheless chose to celebrate the rare bit of good news. They quickly pushed shares of Tenet up 4% to $11.85 -- their highest level in weeks -- on Tuesday.

Dodge Ball

For starters, Tenet escaped the fresh bad-debt hit that some had expected.

Granted, bad-debt expenses jumped 29% from a year ago. But the company's bad-debt ratio, figured as a percentage of net revenue, actually fell from 11.9% to 11% sequentially, even as competitors -- most notably industry leader HCA ( HCA) -- saw their own bad-debt problems accelerate in the latest quarter.

At least one analyst this month predicted that Tenet might be raising its full-year bad-debt guidance instead.

"Given this news by HCA, we believe that there is some risk that Tenet may have to increase its provision for doubtful accounts to a level that is higher than 12%," wrote Citigroup bond analyst Steve Abrams, who recommends selling Tenet's notes. "HCA is better positioned to grow revenues in 2004, which we believe may help it deliver a lower provision for doubtful accounts as compared to Tenet."

Tenet's revenue did, in fact, decline in the latest quarter, slipping 3% to $2.67 billion -- about $50 million shy of expectations -- even though the special Medicare "outlier" bonuses that once boosted results weren't a contributing factor in either period. Revenue per admission slid 1.3% for inpatients and an even greater 4.5% for outpatients.

Volumes softened as well. Both inpatient and outpatient admissions were down slightly from last year. But Tenet blamed the decline on four hospitals it plans to close or sell in the near future.

Lehman Brothers analyst Adam Feinstein was willing to look past this negative trend to "several signs of sequential improvement" in the latest results. He was pleased to see controllable operating expenses inch up just 2.6% -- and bad debts fall sequentially -- though he was surprised by the higher supply costs that are hitting the entire industry. He said that pretax profits and margins came in higher than he expected, because of the reduced impact from outliers and potentially positive developments with managed care pricing. He also noted that the company's cash position improved sequentially and that operating cash flow, while negative $59 million, was still better than he expected.

Weak Spots

Even Weakley gave the company some measure of credit. He said Tenet's modest 1% increase in labor costs "should be considered a victory for the company." But he saw plenty of weaknesses elsewhere. He expressed particular concern about the company's cash flow.

"Ex items, cash flow from operations was a tepid $82 million, not exactly the signal of stability for which some may have been hoping," wrote Weakley, who has recommended selling Tenet's stock for more than a year. Moreover, "the company has offered guidance in the past that would suggest that cash flow for the year should weaken considerably from current levels."

In the meantime, Weakley believes, Tenet's past practices continue to hurt the company's business. Specifically, Weakley worries about Tenet's relationship with the physicians it relies on for admissions.

"Our primary operating concern with Tenet at this point is ... the company's ability to retain its physician base in the face of increased competitive pressure and the negative effect of escalating federal investigations into Tenet's physician relationships," Weakley wrote.

Tenet, which faces a myriad of government probes, is suspected of paying illegal kickbacks to physicians in exchange for patient referrals to its hospitals. One of its facilities, Alvarado Hospital Medical Center in San Diego, has already fielded criminal charges because of the alleged kickbacks. But the company has consistently maintained its innocence and insisted that it has operated within the law.

Legal Break

One analyst suspects that Tenet may actually get a break when defending itself against charges related to its most scandalized hospital. Sheryl Skolnick of Fulcrum recently raised the possibility that Tenet itself might escape the potentially huge liability associated with patient lawsuits filed against Redding Medical Center in northern California. Tenet is suspected of profiting from hundreds of unnecessary -- and sometimes fatal -- heart procedures performed at the Redding facility.

Earlier this month, Tenet agreed to sell the Redding hospital -- which was once among its most profitable facilities -- to Hospital Partners of America for $60 million. The same company, which has some ties to former Tenet hospital executives, scooped up another Tenet facility on the cheap late last year.

Skolnick referred to proceeds from the Redding sale as "spit in the ocean." She also acknowledged that the cash will remain at the Redding subsidiary level and, therefore, provide no help to cash-strapped Tenet itself. But she pointed out that Redding's legal liabilities -- estimated by some at $1 billion -- could remain at the subsidiary level as well.

"It is therefore possible that Tenet, the parent, may never be liable for any possible damages awarded to plaintiffs on the RMC situation," wrote Skolnick, who has a neutral rating on Tenet's stock. "Nevertheless, it still remains to be seen whether the courts will allow the plaintiffs in the RMC and Palm Beach Gardens another lawsuit-plagued hospital cases to pursue any possible damages at the corporate Tenet level, so we do not yet think it is time to celebrate."

Meanwhile, Skolnick remains concerned about the company. She, too, had worried about a rise in bad debt that didn't actually materialize. But she also questioned whether Tenet's core facilities will ever achieve normal industry margins as long as the company owns them.

For its part, Tenet insists that it's making progress.

"Though pricing and bad-debt expense remain significant operating challenges -- and it will take time to successfully address those issues -- our efforts are beginning to show results," CEO Trevor Fetter announced on Tuesday. "We have a long recovery road ahead of us, but we are pleased with the incremental steps we have taken this quarter."

But some are far from reassured. One analyst questioned why Tenet even offered its latest update.

"It is not entirely clear why the company chose to preannounce, since results from continuing operations appear to be slightly better" than expectations, wrote Morgan Stanley analyst Gary Lieberman, who has an equal-weight rating on Tenet's stock. "We continue to believe that the company faces a range of challenges over the next 12-18 months, creating too many unknowns to warrant an aggressive long position in the stock."

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