Investors generally don't appreciate surprises, but they definitely liked the unexpected news they got from Tenet Healthcare Corp. a couple of weeks ago.
The quarterly earnings season for publicly traded hospital companies started off with a bang when Santa Barbara, Calif.-based Tenet, the nation's second-largest hospital chain, told investors that based on an extremely favorable fourth quarter, the company expected much stronger growth in the next few years than expected. Even Wall Street analysts, who routinely anticipate that companies will beat their targets, were somewhat floored at the margin by which Tenet exceeded their estimates.
Tenet's report, while perhaps setting the bar quite high for other hospital companies that have since begun reporting their earnings, seems to have been a bellwether for a portion of the industry that has fully rebounded from the doldrums and sees a profitable future ahead, industry observers say.
Last week, HCA, the nation's largest hospital chain, followed Tenet's lead.
"This is about the best top-line growth we've seen in years, and among the best I've seen in my career," said HCA President and Chief Executive Officer Jack Bovender during a conference call with healthcare investment analysts.
HCA beats the Street
A year after it took a $498 million charge for the civil portion of its Medicare fraud settlement with the federal government, HCA has reversed losses, reporting higher-than-expected earnings for the second quarter ended June 30. The company reported a profit of $263 million, or 48 cents per share-driven by volume gains and improved reimbursement from government and private payers.
In comparison, HCA lost $272 million, or 49 cents per share, in the year-ago quarter, including the settlement charge. Revenue for the quarter rose 8.3% to $4.5 billion. Volume increased 4.2% at hospitals HCA owned for more than a year, and revenue at those hospitals grew 10.6%. Absent gains on sales of facilities and charges related to the government investigation, the 194-hospital chain reported net income of $271 million, or 50 cents a share, in the 2001 quarter, beating analysts' consensus estimates of 46 cents per share, according to First Call/Thomson Financial.
`An outstanding year for Tenet'
Analysts had predicted earnings of 62 cents per share from Tenet's operations for the fourth quarter ended May 31, and the figure came in at 68 cents for the quarter, a 33% increase from the previous year.
"Fiscal 2001 has been a truly outstanding year for Tenet," crowed Chairman and CEO Jeffrey Barbakow during that company's conference call with analysts. "We are pleased to cap it off with the best quarter of the year in every respect, and the best quarter yet in the history of our company."
In the quarter, Tenet's admissions rose 5.5%, with much higher admissions in high-acuity, high-cost services such as cardiology, orthopedics and neurology and among baby boomer patients aged 41 to 60. The company's cash flow also hit record levels, with cash from operations totaling $880 million for the quarter, up from $547 million in the year-ago quarter, thanks to efforts to reduce bad debt and decrease receivables, Tenet officials say.
In addition to playing hardball with managed-care companies, 114-hospital Tenet has made a practice of awarding its hospital finance department officials bonuses based on their ability to boost cash flow. The result was an 11-day decline in accounts receivable days' outstanding to 68 days in the recent quarter.
Tenet's chief corporate officer and chief financial officer, David Dennis, boasted on the earnings conference call that Tenet was, to his knowledge, the only major hospital chain to experience that magnitude of cash-flow improvement in such a short period of time.
"We make cash flow an important part of our incentive compensation system," he said.
After the conference call, Tenet's stock soared $3.24, or more than 6%, to close at a new 52-week high of $54.99.
Although for-profit hospital companies represent only about 15% of hospitals nationwide, the companies, fueled by a recent boost in federal reimbursements from Medicare, are now in a position of financial strength they haven't seen for half a decade.
"I see it as a have and have-not environment," says Merrill Lynch healthcare analyst A.J. Rice. "The for-profit chains, because they focus a little more on quarterly results, focused on their cost-reduction changes a little earlier in 1998 and 1999 and they're benefiting from that now."
Rice says he expects Tenet and Nashville-based HCA to increase their acquisitions in the coming years.
"I do think the activity level is heating up," he says.
John Merriwether, director of financial relations for Health Management Associates, a rural hospital chain that announced a 24% increase in profits last week, says Tenet's upbeat message is likely to be echoed by most of the publicly traded hospital companies.
"I think it's a good indicator that the fundamentals for the sector are back," he says. "There's admissions growth, there's pricing increases, there's expansion, there's a need for services."
The aging of the baby boom generation is also likely to give HMA, headquartered in Naples, Fla., a boost, he says.
Russell Carson, a general partner at Welsh, Carson, Anderson & Stowe, a New York investment firm that is one of the largest private equity investors in healthcare services, is counting on the bullish acquisitions outlook and financial picture for hospital companies in the next five years.
"It's certainly far better than it was two years ago," he says. "We're probably back to the level we were at in the mid-'90s; we still have the ability to grow earnings at 15% to 20% through a combination of acquisitions and internal development."