Updated from 7:24 a.m. EDT

Investors have finally stopped focusing on Tenet's ( THC) legal headaches and are realizing just how sick the hospital chain really is.

For years, investors have banked on a sweeping government settlement to cure the company's problems. But a week after inking a deal, with better terms than some anticipated, the company has seen its stock price fall to its lowest level since 1993. Back then, however, the company had been grappling with new scandals instead of resolving old ones. In other words, it could still take a number of remedial actions -- like settling lawsuits and promising reforms -- that, by now, it has already exhausted.

As a result, Tenet is under pressure to revive its weak operations for its stock price to recover. To some, the company's prognosis has rarely looked darker.

"In our opinion, THC is broke any way you slice it," Argus bond analyst William Eddleman wrote on Thursday. "Even if Tenet can find additional financing to continue operations over the next 18 to 24 months, we believe the company may never be able to repair its tarnished image. Thus , we suggest exiting this credit while there is still the time and liquidity to do so."

Eddleman's warning came after Tenet, following years of negotiations with the Department of Justice, finally agreed to pay $725 million in restitution -- and forego another $175 million in Medicare claims -- for allegedly defrauding the federal government. The company denied engaging in any illegal behavior but expressed regret about its past actions and agreed to operate under a corporate integrity agreement designed to prevent misconduct in the future.

For its part, Tenet says that it does not normally comment on analyst research unless it contains misinformation. However, Tenet says its own employees feel very good about the company's future. It attributed the recent stock decline to investors who exited the stock after failing to see the kind of settlement-fueled rally they had expected.

"That's one explanation," said Tenet spokesman Steven Campanini. "But optimism is high inside Tenet" itself.

To some, including the long-critical Tenet Shareholder Committee, the company seemed to get off cheap. After all, the government had accused the company of stealing $1.6 billion in excess Medicare payments and could have pursued triple damages if it wished.

But Tenet's condition has deteriorated significantly since it stopped collecting those outsized Medicare payments, leaving it unable to cover a much larger fine and still adequately fund its operations. Indeed, Tenet has decided to sell more of its money-losing hospitals -- scaling back in the tough markets of New Orleans and Philadelphia -- so that it can spend extra money on facilities that seem to hold more promise. The company needs that investment to pay off with decent admissions growth, during a widespread industry downturn, in order for it to execute its ambitious recovery plan.

Investors, their hopes dashed time and time again, clearly have their doubts. Their celebration of the company's settlement proved short-lived -- good for a fleeting 9.2% stock gain -- as they starting digesting the serious challenges that lie ahead. The shares, down a penny to $6.52 on Thursday, have now sunk beneath the lows they set before the settlement was announced.

Many analysts believe the shares could drop even further.

Shrink to fit

Following a fresh round of asset sales, Tenet will soon be operating fewer than 60 hospitals -- about half the number it boasted before trouble first engulfed the company four years ago. At the same time, Tenet finds itself burdened with the same kind of hefty debt load that it carried around as a much larger company.

Eddleman estimates that Tenet's remaining hospitals will now be weighed down with nearly $90 million in debt apiece. Moreover, many of those hospitals face expensive operational challenges.

In California, Tenet's largest market, labor costs run much higher than they do in other areas. Florida and Texas, also major markets for the company, suffer from the highest uninsured rates in the nation. Meanwhile, the company's teaching hospitals, including the two facilities that it will continue to operate in Philadelphia, attract seriously ill patients who are very expensive to treat. As a result, they have been hit especially hard by the loss of bonus Medicare payments meant to cover the excess costs of such cases.

Tenet's remaining major market -- which stretches across the states of Alabama, Georgia, North Carolina and South Carolina -- looks much healthier. Those 10 hospitals, by themselves, generate almost 20% of total company revenue and higher profit margins than most facilities.

Still, with the majority of its hospitals losing money, Eddleman wonders how long Tenet can fund its operations -- especially with a stepped-up capital spending program -- and still take care of its giant interest payments. He sees an unsustainable situation and, therefore, recently warned investors one last time to sell Tenet's bonds before dropping his coverage of the company altogether.

Loss of value

Even analysts who believe that Tenet will survive in some fashion -- as most still do -- find the company worth less now than before.

Kenneth Weakley, the UBS analyst who first exposed the pricing games that triggered Tenet's downfall, this week lowered his longstanding $7 price target on the company's stock to $5.25 a share. Weakley based his new target not on the company's earnings projections, which he considers aggressive, but rather on a metric often used to value distressed hospitals in the private equity market. Basically, he no longer analyzes Tenet as if it were a publicly-traded hospital chain at all.

Certainly, he sees no opportunity like that awaiting investors when rival hospital giant HCA ( HCA) emerged from its own scandals a few years ago.

"HCA's recovery from its DOJ problems in 1997 were aided significantly by the lucky fact that hospital admission growth was on the rise, bad debt was not an issue, managed care pricing was improving and government reimbursement was by 1999 substantially better," noted Weakley, who has recommended selling Tenet's stock for years. "For THC to recover, however, much must proceed in the right direction."

'Better than the best'

Tenet itself is hoping for the best.

Notably, the company is banking on a slew of capital improvements to boost inpatient admissions by 1.5% -- and outpatient admissions by an even stronger 2% -- at its remaining core facilities next year. Sheryl Skolnick, senior vice president of CRT Capital Group, portrays the first target as unrealistic and the second as "better than the best in the industry." She doubts that Tenet can hit its ambitious profit and margin goals as a result.

Over the next three years, she notes, Tenet hopes to generate a total of $1.3 billion in earnings before interest, taxes, depreciation and amortization. But to do so, she says, the company will have to grow EBITDA -- which totaled a negative $150 million in 2005 -- by 200% to 300% during that period.

If the company can eventually produce that kind of EBITDA, Skolnick estimates that its stock could be worth about $9 a share in two years and $11 a share in three. But she urges investors to steer clear of that gamble right now.

Indeed, Skolnick has been telling her clients to sell the stock since it fell through the $8 level two months ago.

"Our sell thesis hasn't changed one bit," she announced last week. "We said 57 hospitals were the core; we got them. We said that the earnings power of the 57 is smaller than the bulls think, and we got that. We said that the turn could cost more and take longer, and we got that. Thus , we'll stick with our sell rating and use any enthusiasm over the settlement to reiterate" that stance.

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