By now, investors clearly doubt that Tenet ( THC) can cure itself as planned.Last week, for the first time in nearly two years, investors finally got invited to Tenet headquarters to hear a detailed recovery plan in person. They responded by pushing the stock to its lowest price in more than a decade. Quite simply, Tenet failed to show skeptics how it will boost patient admissions in a tough industry environment. To hit its aggressive targets, Tenet must reverse a long trend of volume declines and start posting industry-leading admission growth instead. The company hopes to see patient admissions swing to a 1.5% rise in 2007 from an expected 2% drop this year. But investors are demanding more than promises. "The company didn't build the bridge from today to tomorrow and explain how they are going to get there," says Sheryl Skolnick, senior vice president of CRT Capital Group. "So the frustration level was quite high. ... I didn't get a sense of outright pessimism, like I have in the past, but there was still a sense of disbelief -- call it skepticism -- that was very strong." Tenet's full-day presentation sparked only one upgrade on Wall Street. Meanwhile, some analysts followed up by reiterating their underperform ratings on the stock even as it fell through their price targets. The stock slid another 17 cents to $6.23 on Friday. The shares now must more than double to hit the highest target on Wall Street. In the meantime, they continue to hover below the average Wall Street target of $7.
In-Depth AnalysisSkolnick views the stock as fairly valued right now, but with the potential to approach $9 if all goes well over the next few years. Compared to many of her peers, the notoriously cautious Skolnick almost seems upbeat. Still, she relied on her own detailed research -- instead of Tenet's latest promises -- when deciding to finally give the company a chance.
Dark OutlookThe analyst who first exposed Tenet's questionable business strategy -- and triggered the stock's collapse -- indicates investors should prepare for a very rough time. Kenneth Weakley of UBS reminded investors last week that Tenet, unlike HCA ( HCA) before it, will be trying to pull off its recovery during a painful industry downturn. Weakley actually began warning about that sectorwide downturn, triggered by a decline in health insurance coverage, four years ago, a few months before honing in on Tenet itself . Weakley feels that his theory has, in fact, been playing out, and last week offered some evidence to support his case. In the past, he says, patient admissions likewise have fallen -- in spite of population growth -- due to changes in health care coverage. More specifically, he notes, patient admissions dropped nearly every year between 1983 and 1992, then barely inched up during each of the five years that followed. As a result, he portrays the healthy growth displayed by hospital companies between 2000 and 2002 -- glory days for Tenet -- as something of an anomaly. "Growth in admissions since 2003 has been anemic," he points out. "But we don't think this slowdown should be characterized in any way as unusual, unexpected or unprecedented."