Updated from 7:24 a.m. EDTInvestors 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.
Shrink to fitFollowing 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.
Loss of valueEven 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."