OKLAHOMA CITY -- This could finally be Tenet's ( THC) comeback year.

The hospital operator has spent half a decade trying to recover from past scandals that hurt its performance in a brutal industry environment. But the company finally showed some encouraging signs of life in the third quarter that, if sustained, could signal a bona fide turnaround.

Tenet will offer its own prognosis when it issues formal guidance next month.

Wall Street analysts, in the meantime, have been dissecting Tenet's latest results in an effort to determine the company's future prospects. To be sure, most still lean toward the bear camp with tepid hold -- if not outright sell -- recommendations.

But a few have warmed up to the company, joining a habitual contrarian who has recommended the stock through multiple plunges over the course of the past year.

"I have a lot at stake," admits Sheryl Skolnick, senior vice president of CRT Capital Group. "If I'm wrong, that keeps me awake at night and makes me dig and dig and dig. I want to make sure that I know as much about this investment as anyone possibly can."

Right now, she adds, "I'm prepared to say that I made a mistake in terms of my timing but not in terms of the ultimate outcome" on the call.

Skolnick has a buy recommendation and a two-year price target of $8.70 on Tenet's shares. Her firm makes a market in the company's securities.

Vital Signs Still Weak

To be clear, Tenet still looks like one sick company.

By now, critics have offered a long list of problems threatening the company's survival. First and foremost, Tenet carries a huge debt burden -- approaching $4.8 billion -- and generates no positive cash flow. The company's debt-to-capital ratio, hovering in the low 70% range just a few years ago, now stands at an astounding 98%.

Tenet needs to boost admissions and lower costs to regain its financial health. Yet even after investing billions of dollars in capital improvements that were intended to attract well-insured patients to its hospitals, the company has seen its volumes steadily erode over the past couple of years. Only uninsured admissions -- which lead to huge bad-debt charges -- have significantly expanded during that timeframe.

Florida, once a prized hospital market, has caused exceptional pain. Weak volumes there, caused by fierce competition for a dwindling number of patients who carry insurance, have wiped out gains mustered elsewhere in the system.

Tenet has nonetheless clung to Florida as a core holding in its 64-hospital chain. Now, the company must repair that market -- which ranks as its second largest -- to turn around its operations as a whole.

Still, there is some reason for hope. Last quarter, for example, Tenet posted rising admissions in a tough Philadelphia market that has been hurting the company for years. The company reported a remarkable turnaround at its largest Texas hospital as well.

In mid-2005, TheStreet.com highlighted marked deterioration -- and widespread physician dissatisfaction -- at Tenet's Houston Northwest Medical Center. Between 2004 and 2006, Tenet has since acknowledged, admissions at Houston Northwest plunged by more than 17%.

Last quarter, however, Tenet reported a solid 8.4% jump in admissions at Houston Northwest, continuing to build on gains posted under a popular new hospital CEO.

"You have to remember today's underperformers could be tomorrow's outperformers," Tenet stressed during the company's upbeat third-quarter conference call. "The Philadelphia market ... and Houston Northwest examples should demonstrate not only that our hospitals are capable of producing consistent results but also that many of them already are."

Miracle Cure

Tenet is hoping that strong leadership at the company in general -- and Florida in particular -- will translate into widespread gains.

With a physician installed as its operating chief, Tenet has already made notable progress in its big California and Texas markets. Recently, the company has snagged an accomplished executive from Triad -- long known for its physician-friendly ways -- to overhaul Florida and boost admissions in that crucial state as well.

Once regarded by doctors as hostile and arrogant, Tenet now goes out of its way to court physicians instead. During the third quarter, Tenet personally visited nearly 6,000 doctors -- up 60% from the year before -- and managed to add hundreds of them to its physician base as a result.

Meanwhile, Tenet's new "commitment to quality" has impressed both physicians and health insurers. In the past, Tenet relied on high prices, rather than superior care, to boost its performance and posted low quality scores as a result. But under its current strategy, adopted in 2004, Tenet now boasts quality scores well above those of its peers.

Health insurers, seeking top-notch care that promises few complications, have taken notice. Tenet hospitals are six times more likely to carry UnitedHealth's ( UNH) coveted "center of excellence" designation -- triggering generous bonus payments -- than are facilities outside the company's system. Aetna ( AET) and Blue Cross have rewarded the company with higher rates as well.

"The world is moving toward a pay-for-performance model," Tenet CEO Trevor Fetter emphasized during an investor conference hosted by Merrill Lynch in late November. "And our commitment-to-quality strategy was really designed to put us ahead of that curve."

That strategy paid off handsomely in the latest quarter. More than anything, rising prices boosted the company's results. Operating revenue jumped by 7.5%, the highest rate in a while, despite an ongoing decline in admissions.

Still, Tenet has relied on escalating prices with disastrous results in the past. Some critics pounced on that strong metric as a result.

Credit Suisse analyst Kenneth Weakley, who exposed the aggressive pricing games that led to Tenet's collapse, was among that camp. Weakley has long recommended selling Tenet's stock, which he currently values at a Street low of $2 a share. The stock closed at $4.64 Wednesday.

"On the fifth anniversary of THC's infamous conference call (11/7/02) disclosing the nefarious impact of its gross charge pricing strategy, we would remind investors that 'pricing stories' in the hospital industry have a less-than-perfect history of creating long-term value," cautioned Weakley, whose firm has investment banking ties to the company. "Volume and patient mix are keys. And more history is needed before one can point to a new trend."

Healthy Results

For its part, however, Tenet feels that it has delivered broad-based improvement -- extending well beyond pricing -- that signals a lasting turnaround.

The company's third-quarter admission decline, especially among lucrative commercially insured patients, ranked as its smallest in recent memory. Moreover, it marked its second major quarterly improvement in a row.

Excluding its especially troubled hospitals, in fact, Tenet actually saw admissions climb a bit.

Granted, some of that volume resulted from uninsured patients who often fail to pay their bills. But that business no longer hurts Tenet as much as it once did. Thanks to a major improvement in its collection rate, Tenet managed to hold its third-quarter bad-debt ratio steady despite an ongoing rise in patients who lack health insurance.

Tenet continues to cut so-called "controllable" expenses as well. The company took particularly aggressive steps in the latest quarter by trimming its hospital workforce by 2.7% and its corporate head count by almost three times that amount.

Now, Tenet looks well positioned to deliver yet another solid quarter. The company has already touted healthy volumes for October, while stressing that savings from recent staff reductions -- executed throughout the third quarter -- should be more pronounced this time around.

Even Genesis Capital managing partner Jeff Villwock, long critical of Tenet, feels somewhat optimistic now.

"The fourth quarter should be okay -- and maybe even better than okay," Villwock told TheStreet.com earlier this week. "They can have a reasonably good year in 2008, too.

"I've never talked about this company as a turnaround, and I still think that's premature," he added. "But I will give the operating team some credit ... They've bought themselves some more time."

Looking further ahead, Villwock suspects that Tenet will lower its aggressive 2009 projections and set more achievable targets. But he plans to profit from the company's improvement in the meantime.

Encouraged by Tenet's third-quarter update, Villwock covered his short position and now owns "a very small" long position in the stock.

"I got an email back from a friend" that day, he recalls. "'What happened?' he asked. 'Did hell finally freeze over?'"

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