The healthy bottom lines of publicly traded hospital companies in the most recent quarter showcased a continuing ability to attract more patients and charge more to private insurers. Yet as some industry heavyweights failed to greatly exceed analysts' earnings expectations, some experts are saying the days of pleasant earnings-per-share surprises, which for the past year had become almost a given, may be over.
That sentiment translated into sharp dips in share prices of some of the hospital companies' stocks immediately after their third-quarter earnings releases earlier this month.
For example, the nation's largest hospital chain, Nashville-based HCA, reported its net income rose 47% to $256 million, or 48 cents per share, from $174 million, or 31 cents per share, a year earlier. Those figures include a $16 million charge to resolve nongovernment litigation, a $68 million gain on facility sales, a $10 million charge for the impairment of some assets and $11 million in restructuring and investigation costs related to the company's ongoing settlement talks with the U.S. Justice Department. Revenue rose 8.4% to $4.4 billion. Eliminating the unusual gains and costs, the 189-hospital chain reported net income of $209 million, or 40 cents per share, a 12.4% increase from the company's performance in the year-ago third quarter.
"We had an excellent third quarter, the best revenue quarter in the company's history," Victor Campbell, HCA's senior vice president, said during a conference call with healthcare analysts.
However, in comparison with its second quarter, when HCA exceeded analysts' consensus earnings-per-share estimate by 4 cents, or 8%, the company met but did not exceed the consensus expectation of 40 cents per share in the third quarter. HCA shares dropped 6% on the news, in exceptionally heavy trading, to close at $38.74 on the day of the company's earnings announcement.
"I think people are looking for any sign that the ability to have significant upside surprises in earnings . . . is declining," says Frank Morgan, a healthcare analyst with Jefferies & Co. in Nashville who covers HCA. Although the fundamental elements that contribute to growth for the industry remain in place, it has become less likely that hospital companies will overshoot the mark, he says.
The sharp decline in HCA's share price also might have been fueled by concerns about the company's margins, he says.
The company reported a decline in its margin for earnings before interest, taxes, depreciation and amortization, a common measurement of a company's cash flow. The EBITDA margin dropped to 17.4% of the company's revenue in the quarter ended Sept. 30, from 18% in the year-ago period. HCA blamed the decline on the $16 million charge for nongovernment litigation, which Campbell said shaved 2 cents from the company's earnings per share.
HCA was not alone in reporting strong profits that nevertheless disappointed Wall Street.
LifePoint Hospitals, an HCA spinoff based in Brentwood, Tenn., saw its stock decline 12%, or $4.56 per share, to $33.13 after its third-quarter earnings announcement, despite a 56% jump in profits for the period. LifePoint, which owns or leases 22 rural hospitals, reported net income of $7.5 million, or 20 cents per share, for the quarter ended Sept. 30, compared with $4.8 million, or 14 cents per share, in the year-ago quarter.
Robert Mains, a healthcare analyst with Hartford, Conn.-based brokerage firm Advest, says the company's 8.5% growth in same-facility revenue, even though considered strong by most benchmarks, was the slowest since 2000.
"That's pretty good," he says. "However, it wasn't sensational, which they've been able to do the past two to three quarters."
LifePoint's per-share earnings, which beat analysts' expectations by a penny, included 3.7 million shares more than in the previous year's quarter, as a result of a March 2001 secondary offering. The company's revenue increased 3% to $149.2 million.
Other hospital companies also reported strong earnings, with mixed reaction from investors. Health Management Associates, Naples, Fla., reported net income for its fourth quarter jumped 33% to $51.9 million, or 20 cents per share, from $39.1 million, or 16 cents per share, in the year-ago quarter. Revenue rose 20% to $491.2 million. HMA owns or leases 38 hospitals. For the year, HMA's net income grew 16% to $195 million, or 76 cents per share, while revenue rose 19% to $1.9 billion.
"We met or exceeded all our objectives we set out a year ago," HMA Chairman William Schoen said at a luncheon with analysts. "We're even more excited about the year ahead." The company beat consensus estimates by a penny, but its share price dropped 37 cents to $19.90.
Triad Hospitals, Dallas, earned $6.5 million, or 9 cents per share, in the third quarter, compared with a loss of $1 million, or 3 cents per share, in the year-ago period. The 9-cents-per-share earnings exceeded analysts' consensus estimate by 2 cents per share. Revenue soared to $829.5 million from $301.3 million in the year-ago period, reflecting Triad's April acquisition of Quorum Health Group. Triad's stock rose 2.5% to $28.56 per share the day of the earnings announcement.
Community Health Systems, Brentwood, Tenn., reported its third-quarter net income soared nearly eightfold to $10 million, or 11 cents per share, from $1.3 million, or 2 cents per share, in the year-ago period, during which the company completed its initial public offering. Revenue rose 22% to $416.6 million. CHS, which owns or leases 56 hospitals-most of them rural-beat analysts' expectations by 2 cents, but its stock price dropped less than 1%, or 5 cents, to $23.50 per share.
Province Healthcare Co., also based in Brentwood, reported a 28% jump in net income to $6.9 million, or 21 cents per share, for the third quarter from $5.4 million, or 17 cents per share, in last year's quarter. Province met but did not exceed consensus earnings estimates. Revenue rose 10% to $131.8 million. Its stock price rose 60 cents to $29.14.
Morgan says some of the rural hospital companies' ability to wring more revenue growth out of their existing hospitals may be slowing, and that they will have to accelerate their acquisition pace to overcome the slower internal growth.
"I'd say we're entering a period where it's becoming increasingly difficult to beat the numbers by the levels they all have been over the past several quarters," he says. "They may continue to beat them to some degree, but the days of the kinds of upside surprises you've seen over the past four to five quarters, those days are going to be fewer and far between."