Hospital chains like Tenet Healthcare ( THC) and Universal Health Services ( UHS) have just suffered through an especially painful third quarter. Both companies, along with industry giant HCA ( HCA), weathered serious damage as a result of two recent hurricanes. Moreover, they have taken the big storm-related hits at a time when major challenges -- such as weak volumes and bad debts from the uninsured -- continue to hurt the industry as a whole. Thus, some experts have started bracing for poor results from the group. Lehman Brothers analyst Adam Feinstein, in fact, downgraded the entire sector from positive to neutral on Monday in anticipation of a "very tough earnings season" for most of the companies he covers. (Lehman Brothers does and seeks to do business with companies covered in its research reports.) "We believe it was a stormy quarter for the health care facilities sector -- both figuratively and literally," Feinstein explains. "We have very low visibility, and the only thing we are certain about is that there will be continued 'uncertainty' for the remainder of the year." Previously, Feinstein notes, investors had hoped to see the hospital industry make some progress after a particularly rough June quarter. Instead, he notes, the sector found itself wounded further by hurricanes Katrina and Rita. Still, he stresses, the group was hurting even before that destructive weather hit. "We believe that the timing of the storms could not have been worse, with companies already experiencing lower utilization trends," he says. "As a result, we suggest that many companies will view this as a 'free pass' and take this opportunity to reduce expectations (or 'reset the bar'). Although the market may look past this issue since hurricanes are an extraordinary item, we do not anticipate a meaningful uptick in volumes anytime soon." Indeed, Feinstein singled out one company with limited hurricane exposure -- Health Management Associates ( HMA) -- for an individual downgrade on Monday. He cut his recommendation on LifePoint Hospitals ( LPNT) from overweight to equal-weight as well.
Shares of HMA slid 1.7% to $23.07 on the report. LifePoint's shares fell an even harder 3% to $42.40.
Meanwhile, Tenet itself continues to bleed. Feinstein believes the company will report a loss of 7 cents a share -- 3 cents worse than the consensus estimate -- when it provides a quarterly update next month. The company's stock, which topped $13 before the storms hit, tumbled 2.5% to $10.95 on Monday.
Going forward, Feinstein sees lingering problems for the hospital group as a whole. Indeed, he points to bad debt from the uninsured -- which has dogged the industry for years -- as the biggest challenge of all. "Our extensive channel checks suggest that bad debt expense has not improved (with little improvement in the uninsured population) and will likely continue to persist at current levels for the remainder of the year," he says. "Although we believe that bad debt expense will be stable, we are now pushing back our expectation for improvement until next year. (And) it is our contention that bad debt expense must improve for the group to trade higher from current levels."