Tenet 1Q Preview Shows Co Progress, Maybe Industry Stamina

Tenet Healthcare Corp.'s (THC) preview Tuesday of strong first-quarter results indicates the hospital operator is making progress in cost-control efforts and adds to evidence the sector may be holding up OK in the recession.

The Dallas-based company's announcement came a week after privately held HCA Inc. projected first-quarter results that sparked a rally in hospital stocks. Tenet shares rose 35%, or 50 cents, recently to $1.92, and earlier broke the $2 mark for the first time since last year. Other hospital shares climbed slightly.

Tenet, which has struggled for years to turn itself around, boosted its 2009 outlook for underlying income and said its preliminary first-quarter per-share operating earnings far exceeded Wall Street's average estimate. Projected first-quarter revenue, though, fell short of analyst views.

"All in all that was an outstanding quarter," said CRT Capital Group analyst Sheryl Skolnick. Some of Tenet's results probably signal relatively reassuring industry trends for uncollected patient bills and admissions, while others reflect company specific measures to control costs and recruit physicians, she said.

Barclays Capital analyst Adam Feinstein noted that margins were better than anticipated, at 12.1% versus his 8.9% estimate. Credit Suisse analysts remained positive on the shares even after the 35% runup, citing its optimism about volume and expense trends, and saying Tenet stands to gain market share from nonprofits and to benefit from health reform.

Following HCA's report last week of a lower patient bad-debt ratio, Tenet's projection of only a slight increase in that measure year over year indicates bad debts may not be so bad, said CRT's Skolnick. In addition, the industry's volumes of profitable managed-care patients, while lower, don't appear to be disastrous, she said in an interview.

Tenet's same-hospital admissions declined 1.3% in the first quarter, with managed-care admissions down 3.2%, while outpatient visits rose 0.7%. Adjusting for calendar differences, managed-care volumes probably were down only 2% in the first quarter, compared with a roughly 3% decline in 2007, Skolnick estimated.

She suspects Tenet didn't see much increase in volumes of uninsured patients, and said admissions of such patients might have declined, although the company didn't specify. While it's too early to tell, Tenet and HCA's reports may indicate that even in the recession, people are keeping their insurance, perhaps helped by a newly approved government subsidy for Cobra insurance for those who lose their jobs in layoffs.

As for company specific progress, Tenet now has many more doctors, which translates into more patients, which should offset the negative effects of the economy, according to Skolnick. Tight cost-controls and savings initiatives appear to be working, contributing to decent revenue growth, and "they had a very strong cash flow quarter from operations," she said.

-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; [e-mail]