Pain keeps spreading in the hospital sector. Two weeks after industry giant HCA ( HCA) first warned of a third-quarter shortfall, other hospital operators continue to limp forward with weak results of their own. Health Management Associates ( HMA) will soon break a strong record of meeting -- and often beating -- Wall Street expectations, according to a preannouncement issued Thursday night. Meanwhile, Universal Health ( UHS) has now managed to deliver its third earnings miss in a year. Both companies weathered a severe spike in bad debt from the uninsured, a chronic industry problem that was only exacerbated by the Gulf Coast hurricanes. HMA expects to report fourth-quarter profits of 35 cents a share, 2 cents shy of the consensus estimate. The hurricanes caused only part of that shortfall, with insurance recoveries from past storms more than offsetting their impact. Weak patient volumes, coupled with higher provisions for doubtful accounts, hurt the company more. During the latest quarter, HMA saw same-hospital admissions inch up just 0.4%, even as uninsured admissions kept rocketing. "HMA continues to be challenged by an increasingly uninsured patient mix," wrote Bear Stearns analyst Jason Gurda, who has a market-weight rating on the stock. "Based on some initial data from the company, we estimate that uninsured admissions increased approximately 10% during the September quarter. ... Two of HMA's markets -- Florida and Texas -- continue to see material uninsured growth, and the impact of the hurricanes only makes these trends worse." All told, 7.5% of the patients treated by HMA hospitals last quarter lacked health insurance coverage. That figure is up from 6.9% one year ago. As a result, HMA found itself increasing its provision for doubtful accounts to 8.2% of total revenue -- compared with 7.5% a year earlier -- and writing off more business up front as charity and indigent care.
The company has offered a dark prognosis for the future as well. It issued 2006 guidance of $1.56 to $1.60 a share that's well short of the current $1.67 consensus estimate. By now, however, many experts have already cooled on the former Wall Street darling. J.P. Morgan analyst Andreas Dirnagl downgraded HMA's stock to neutral a few months ago over two concerns in particular. First, he worried about "intense weather" in the company's core southeastern market that has, in fact, proven worse than most people could have imagined. And second, he fretted over the company's expansion beyond the rural markets into areas that tend to be more exposed to negative industry trends. Dirnagl said on Friday that HMA's latest announcement "serves to support our concerns." "HMA shares may appear attractive to some," he added. "However, given the preannouncement and 2006 EPS guidance below current consensus, sentiment for the stock is likely to be weak." Actually, the stock was holding up fairly well on Friday. It inched up 6 cents to $21.47 but continues to trade near its low for the year.
McAllen/Edinburg, Texas is stronger and tougher than UHS highlighted on its 2Q05 conference call and consider this market likely to perform below historical levels for an extended period of time. ... We're not going to step in front of this stock now."
Still, UHS has a potent weapon that its competitors lack. The company boasts one of the strongest behavioral health franchises in the country. That division continued to shine -- with higher revenue, admissions and margins -- in the latest quarter. That kind of outperformance offers hope for some. "We maintain our neutral rating," Dirnagl wrote after Thursday's disappointment. But "at this point, it is only the strength of the behavioral business and capital structure that keep us from being more negative."