2/23/04
4:02:00 PM EST
Reuters,
02.23.04,
5:58 PM ET
U.S. Corporate Bonds United States
Corporate Bonds
By William Borden
NEW YORK, Feb 23 (Reuters) - Valuing No. 2 U.S. hospital operator Tenet
Healthcare Corp. (nyse: THC - news - people)
has not been easy over the past year due to its shrinking cash flows, asset
sales and the possibility of its paying large settlements, financial analysts
said.
"My biggest challenge in deriving some sort of valuation from these guys
is because it's almost like a biotech company," said Robert Mains, analyst
at Advest who has a "neutral" rating on the stock.
Analysts are not forecasting much as far as Tenet's earnings for 2004 and 2005.
On the risk portion of that equation, Tenet is facing many varieties. These
factors are very similar to what biotechnology companies face.
With most companies, analysts determine the value by applying a
price-to-earnings multiple to the stock or forecasting cash flows and then
discounting it based on an expected rate of return or risk investors will
tolerate.
Tenet's risks are not easily measured because many of them are tied to
courts from Redding Medical Center lawsuits and Medicare regulators. Some
analysts peg possible settlements as high as $2 billion to $3 billion but admit
estimating is not an exact science.
The company is facing a backlash after what Tenet's former chief executive
acknowledged to be an "aggressive pricing strategy" that led to a
government probe into its Medicare bills and to health insurers taking a tough
stance in contract talks.
Tenet's share price fell from more than $50 in October 2002 after UBS analyst
Kenneth Weakley downgraded the stock because an inordinate amount of its growth
came from Medicare outlier payments, which are funds to treat the sickest
patients.
Tenet shares closed at $12.34 on Monday on the New York Stock Exchange. The
stock flirted with $18 per share in January, but fell sharply later that month
after a dismal outlook and a plan to sell assets.
In a Feb. 9 interview, Tenet Chief Executive Trevor Fetter said the company has
improved the tone of its relationship with regulators after the company
voluntarily cut outlier fees.
The relationship with health insurers is less placid, with an estimated $250
million in hospital bills being disputed, Tenet said.
"Managed care companies are playing hardball at this point, since they
feel that they have been overcharged and the prices need to come down,"
said Maryann Hennessey, a research analyst at Criterion Research Group who has
"sell" ratings on the stock and bonds.
A company spokesman said Tenet is negotiating with managed care companies but
will not let them take advantage of its predicament.
On the plus side, hospitals are not easily replaced. Also, investors are hoping
for big returns similar to HCA Inc.'s (nyse: HCA
- news - people)
after criminal charges in 1997 and government budget cuts in 1998 and 1999. HCA
surged from $18 in early 1999 to more than $50 by May 2002, not counting the
value from its spin-off companies, LifePoint Hospitals Inc. (nasdaq: LPNT - news
- people) and Triad Hospitals Inc. (nyse: TRI - news
- people)
This has value-oriented mutual fund groups, such as Pacific Financial Research
Inc. (11.81 percent) and Legg Mason Fund Advisors (7.07 percent), holding
substantial portions of Tenet stock as of December 2003. Those firms declined
to return calls seeking comment.
Tenet's plan announced in January to sell 27 hospitals has made measuring the
value of the Santa Barbara, California-based company slightly more complicated.
The company is anticipatingabout $600 million from those facility sales from
tax benefits after an estimated $1.4 billion charge.
Tenet's earnings before interest, taxes, depreciation and amortization (EBITDA)
are expected to fall to $1.19 billion for 2003 and drop to $705.5 million in
2004, analysts surveyed by Reuters Research said. None of the 26 analysts
surveyed have "buy" or "outperform" ratings on the stock.
The company said its operating earnings per share before unusual items will be
11 cents in 2003 and 50 cents in 2004.
Copyright 2004, Reuters News Service