Even with HCA ( HCA) attracting a suitor, another hospital chain -- and former Wall Street darling -- could have a hard time turning heads.For years, Health Management Associates ( HMA) managed to woo investors with its industry-leading metrics. However, as HMA has grown larger and strayed from its proven rural focus, results have stopped impressing investors. HMA's profit slid 11% to $77.3 million in the latest quarter. Even worse, the company's closely watched profit margins took another big hit as well. Sheryl Skolnick, senior vice president of CRT Capital Group, believes that serious missteps by top management have caused the company to lose its appeal. As a result, she believes any leveraged buyout binge in the hospital sector is likely to pass HMA by. "HMA management is still behind the curve and, in our view, likely would have to be replaced in an LBO," Skolnick wrote on Wednesday. "The only thing they've demonstrated is that they can push margins down and overpay for beds and, as such, have failed to generate improving returns. That, coupled with the premium ... on HMA shares, makes us highly skeptical that HMA is an LBO candidate." To be sure, HMA's second-quarter results won't help. The numbers looked dismal almost across the board. Yes, revenue jumped 8.2% to $1.02 billion during the period. But the company uses higher list prices than many, and the one group asked to pay those steep prices -- the uninsured -- really can't afford them at all. Thus, any revenue booked for those patients will likely end up in the bad-debt column down the road. And bad debt is, well, already bad. With uninsured admissions rising once again in the latest quarter -- even as total same-store admissions fell -- HMA found itself writing off a full 8.9% of its revenue to cover bad-debt expenses. It wrote off an added 4.1% to cover charity care for the poor.
To be fair, HMA has been hurt by the same challenges faced by others in the industry. But this is a hospital company that has been known to flourish when others falter -- and continues to be rewarded for that distinction even now. Perhaps, some muse, investors simply choose to see what they have always wanted to see when they look at HMA: the fit rural hospital operator that the company once was. But Skolnick, for one, believes that they will have to open their eyes sooner or later. "That the equity market continues to labor under the misapprehension that HMA is the same rural sole provider that it used to be -- and is, therefore, deserving of a premium multiple -- is a market inefficiency that we strongly believe will eventually be eliminated," Skolnick wrote. "That is the core of our 'sell' thesis, and we are more confident and more convinced of its validity today than ever." Skolnick has a $17 price target on HMA's stock. The shares, lifted recently on buyout speculation, inched up 3 cents to $21.10 on Wednesday. The company failed to return a call from TheStreet.com seeking comment for this story.
"Listening to HMA's physician relationship strategy yesterday was like listening to Tenet Healthcare's splitter doc strategy a year ago; the similarities are striking to us, yet they shouldn't be there at all," she wrote. "How can these physicians -- whose needs and wants clearly were not being addressed in any formal, consistent way prior to this quarter -- be referring elsewhere if HMA doesn't have any competitors?" Her explanation was blunt. "The simple answer is that HMA is no longer a rural monopolist," Skolnick said. "And if the reader doesn't believe us, all one has to do is look at HMA's margins."