Patience isn't exactly a Wall Street virtue. But lately investors' forbearance is being tested on a regular basis by Columbia/HCA Healthcare Corp.
The troubled healthcare chain remains the nation's largest with 342 hospitals, 285,000 employees and 1996 revenues of nearly $20 billion. But what shareholders of the Nashville-based chain really care about is per-share earnings.
Columbia already has predicted an erosion in third-quarter earnings. That, combined with news of a widening government probe of the company's operations, has shaken investors' confidence. Since March 19, when Columbia's El Paso, Texas-based hospitals and offices were raided by federal agents, shares have lost a third of their value, tumbling to $28.63 on Sept. 12 from $42.38 on March 19 in New York Stock Exchange trading. The stock had rebounded, but it fell again in mid-July after a second round of raids on Columbia facilities.
"Obviously, the troubles plaguing Columbia are shattering (investors') outlooks," says Linda Miller, a vice president and portfolio manager for John Hancock's Global Rx, a specialized healthcare fund that holds a small amount of Columbia stock. Miller declined to reveal her fund's total investment in Columbia or whether she has dumped shares.
Investors who hold Columbia's corporate bonds and commercial paper are anxious, too. Moody's Investors Service, citing uncertainties about the company's strategic direction, recently lowered Columbia's senior long-term debt rating to Baa1 from A3. Days later, Standard & Poor's Corp. placed Columbia's commercial-paper rating on CreditWatch with a negative outlook (Sept. 15, p. 2). Meanwhile, Fitch Investors Service still maintains A and F1 ratings on the company's senior debt and commercial paper, respectively.
"The largest issue is how Columbia reacts to the government investigation," says Elie Radinsky, a Standard & Poor's analyst. "One of the great uncertainties is how strict the government will be with Columbia."
It's too much for some investors to stomach. While Columbia's bonds are investment-grade, they're trading like junk bonds. The bonds have cheapened because investors are demanding higher yields for assuming greater risk, analysts say. The yield gap between Columbia's 30-year bonds and U.S. Treasury securities has widened to about 145 basis points-similar to a mid- to strong BB credit-compared with a pre-crisis spread of 80 basis points. One percentage point equals 100 basis points.
"In the investment-grade world, that's like a catastrophe," says one investment banking firm analyst who spoke on condition of anonymity. However, he says it's too soon to know whether the bonds will actually descend to junk status-BB+ or lower.
At this point, bondholders haven't fled en masse, says another analyst, who asked not to be identified. Investors who are hanging tight are hoping current spreads reflect the downside, he says. But until issues involving the government probe and management strategies are ironed out, it will be a very fragile period for Columbia, he adds.
Since taking over as chairman and chief executive officer of Columbia, Thomas Frist Jr., M.D., has made it his top priority to resolve government litigation. Analysts say Columbia appears to be acting in good faith, but they don't think a quick settlement is very likely.
Meanwhile, Frist says he is downshifting the company out of an aggressive-growth mode and refocusing the business on what's good for the patient. Speaking at Bear, Stearns & Co.'s annual healthcare meeting earlier this month, Frist said the company needed time to catch its breath.
"We're not going into any new markets now. This is basically taking a deep breath-pausing," he told the group.
But what analysts wanted to hear were details of Columbia's profitability. Frist's speech on company strategy preceded a question-and-answer session during which investors, money managers and analysts grilled him and his management team about revenues, earnings and the financial impact of company restructuring efforts.
Columbia anticipates third-quarter earnings will drop by half to between 20 cents and 25 cents per share, compared with 46 cents per share in the year-ago period. Revenues also will be down slightly, the company said.
"I think people were surprised by the magnitude of the decline," says A.J. Rice, a Bear, Stearns analyst. Rice, who rates Columbia "attractive," says the stock is a good buy for long-term investors. "It's something that will turn around quickly once there's positive news on the investigation."
Columbia's depressed stock price represents a buying opportunity to others as well. Boston-based Fidelity Investments, one of the chain's largest stockholders, recently bulked up on Columbia stock. As of Aug. 31, Fidelity held 67.04 million common shares, or a 10.37% stake in the company. The mutual fund company's June 30 filing with the Securities and Exchange Commission disclosed ownership of 45.48 million Columbia shares, or a 7.19% ownership interest. A Fidelity spokesman declined to discuss the investment decision.
The California Public Employees Retirement System is sticking with Columbia, despite the chain's troubles. A CalPERS spokesman says the pension fund doesn't divest shares just because a company it sees as a solid performer is going through a rocky period.
But analysts who follow the stock have cut their earnings estimates in recent days. According to First Call, which compiles analysts' earnings forecasts, the average estimate of 26 brokers covering Columbia is that the company will earn $1.98 per share in 1997 and $1.96 in 1998. A month ago, those average estimates were $2.55 for 1997 and $2.85 for 1998.
Erik Wiberg, a healthcare analyst with UBS Securities in New York, expects Columbia to generate $1.85 per share in 1998.
"I think there's a lot of value in the company," he says, "but I think it's going to take a long time before that value's going to come to the fore again."