The stock market is not very forgiving, and it does not react well to surprises or messages it does not understand.
Hospital companies have suffered from investor jitters in recent months as federal investigations, legislative uncertainties and earnings surprises have jolted confidence in the hospital sector.
Some hospital executives and analysts foresee a more stable and predictable environment in the months leading up to 2000; but others are wary of jumping into a sector that has performed so weakly compared with others.
During the first six months of this year, the Dow Jones industrial average rose 19.5%, but hospital company stocks plunged 22.7%, according to a report by HealthCare Markets Group, a healthcare advisory and investment banking firm that examined the stocks of 10 publicly traded hospital companies.
Compared with the 14.4% increase in share prices these companies saw during the first half of last year, the first half of 1999 looks grim. But on the bright side, the half-year data were an improvement over the 32.8% decline the same companies saw during the first quarter of 1999.
"(Hospital companies are) not as compelling as other segments in the healthcare industry," says John Cumming, managing director of the Hilton Head, S.C.-based firm. "And (the hospital company segment) is even less compelling than other industry segments outside of healthcare, and that is a fact that all healthcare companies are faced with today-and certainly in the near term-that's not going to change."
According to HealthCare Markets Group, the hospital stocks were near the bottom of the healthcare sector. The companies that performed worse than hospital companies were long-term-care, assisted-living, practice management and drug distribution companies.
In keeping with the broader market, healthcare-related Internet commerce companies were a dramatic exception to the segmentwide slump, showing a 162.5% increase in share prices during the six-month period.
Some hospital companies aim to take advantage of the market's disfavor.
After Naples, Fla.-based Health Management Associates warned that its third-quarter earnings would remain flat, consistent with last year's quarter, the company's stock took a beating (July 19, p. 15). HMA's warning a week before releasing earnings dragged down the share prices of other hospital companies, including Brentwood, Tenn.-based Province Healthcare, which like HMA concentrates on rural markets.
As investors attacked HMA for the surprisingly disappointing quarter, company officials announced that HMA would continue its share repurchase program, authorized in February, of up to 7.5 million shares of its own stock.
HMA Chairman and Chief Executive Officer William Schoen says he expects hospital companies overall to remain undervalued for the next 18 months.
"We think our stock is especially undervalued at this point in time, and that's why we're buying it back," he says.
Merilyn Herbert, vice president of investor relations at Province Healthcare, says her company is suffering some market backlash from HMA's situation, because investors took it as a sign that Province, too, might disappoint them.
"We got hit because of that," she says. "Frankly, I think it is unfair to assume that whatever HMA's problems may or may not be will apply to our or any other company."
Herbert blames some of the investor skittishness on a lack of reliability from hospital companies that have long been industry bellwethers, such as HMA and Nashville-based Columbia/HCA Healthcare Corp.
"I think that we need to see, as an industry, some companies producing results consistently," she says. "The really long-term players are the Columbias of the world, the HMAs, and if they can begin to produce the results the investment community is expecting for two to three quarters, then things will get back to normal."
Peter Costa, a healthcare services analyst with ABN AMRO Chicago Corp. in Boston, agrees that the hospital companies segment lacks leadership.
"With Columbia under the cloud of an investigation, with Tenet (Healthcare Corp.) offering repeatedly lower earnings guidance, and HMA having its problems, there really isn't any significant leader in the sector that has been growing," he says.
Salomon Smith Barney healthcare analyst Deborah Lawson says she hopes that in October, the second anniversary of the Balanced Budget Act of 1997, hospital companies' results will begin to be more predictable.
It will be the first time that wide-scale provisions of the budget law will not be kicking in, which should make year-to-year earnings comparisons more reliable in the sector, she says.
Costa says growth investors have by and large dropped hospital stocks altogether, and value-oriented investors are primarily interested in the sector.
But some of the challenges hitting the hospital companies could eventually bring back long-term investors, he says.
"You could argue the pressures being felt by some hospitals could reignite the acquisitions game that has slowed down significantly over the past couple of years," he says. "I think that can get some excitement going and some interest back in the group."