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.
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.
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.
"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."