Thanks to HCA ( HCA), the ailing hospital industry is now sporting a healthy glow. HCA materially boosted its fourth-quarter expectations on Wednesday, sending the long-suffering hospital sector into a powerful relief rally. HCA plans to report quarterly profits of between 68 cents and 72 cents a share -- well ahead of the 55-cent consensus estimate -- when it formally releases earnings next month. But at least one industry expert was quick to attribute much of that upside to items that are unusual in nature. Fulcrum analyst Sheryl Skolnick pointed to a reduction in the company's bad-debt reserves as a particularly important factor. She also highlighted a reduced tax rate that may not be sustainable. Together, HCA indicated that the two items boosted earnings by 10 cents a share. A major reduction in the company's share count, following a recent Dutch auction buyback, also helped out. All told, Skolnick estimates that "more like 16 cents" -- or basically all -- of the upside surprise came from unusual items. Meanwhile, she continues to see operational challenges at the company. "Saying admissions were weak would be kind," said Skolnick, who has a neutral rating on HCA's stock and has long been cautious on the group. But "the sense that I have is that this is a company that is determined to find ways of not missing numbers." HCA's stock surged 8.1% to $42.90 on the upbeat report, while rivals rose between 1% and 3%.
my sustainability concern," Young said.
Skolnick questioned the sustainability of HCA's new bad-debt policy as well. The company reduced its allowance for doubtful accounts due to recent improvements in collection trends. The favorable development added $46 million, or 6 cents a share, to fourth-quarter earnings. This is a "change in policy so
it is 'permanent' -- until the next change in collection rates," Skolnick said. Indeed, HCA has left some questioning the sustainability of the company's overall recovery. Notably, the company raised only its fourth-quarter estimates and not its 2005 outlook. Going forward, Skolnick believes that HCA could wind up seeking radical ways to grow. In the past, she notes, HCA has both taken itself private and split itself up when facing challenges. "This is a company that is deeply experienced at restructuring itself," Skolnick said. "There is no reason why it couldn't consider doing that again." So we see modest near-term upside for stocks that clear this week without preannouncing." Still, HCA's higher outlook -- following material warnings from both Universal Health ( UHS) and Tenet ( THC) -- clearly came as a surprise.
Last month, Universal Health said it would fall short of prior guidance because of "increased operating challenges" in certain markets in which it operates. The company said it is struggling to bring costs down quickly enough to help offset a decline in patient volumes. Similarly, Tenet said that fourth-quarter earnings would be hurt by weak volumes and high bad debt expense. Moreover, the company now expects to only break even -- at best -- next year. "We need a return to sustained increases in volumes," Tenet CEO Trevor Fetter explained. "For volumes to recover, however, we need to substantially resolve our open litigation and investigation matters."