Sector Snap: Hospital Operators

Credit Suisse analyst Ken Weakley said Tuesday the sector's 2007 fourth-quarter was likely affected by soft admission growth, which comes at a bad time for those attempting a turnaround, such as Health Management Associates Inc., Lifepoint Hospitals Inc. and Tenet Healthcare Corp.

Consumers struggling to make mortgage payments and pay high gasoline and food bills also may not be able to afford health insurance bills, which would increase the number of uninsured in hospitals and drive up bad debt levels.

Nevertheless, Weakley upgraded shares of Health Management to "Neutral" from "Underperform" and maintained a target price of $6. He said the stock is trading appropriately compared with its peers, but he is a bit more positive on HMA than the others going forward.

"We believe that the new management team that was put in place in 2007 may in fact bring an inflection point in the operations of the company, yet we maintain that tangible results remain a year away," Weakley wrote in a note to clients.

He said HMA now has a proactive strategy to address issues and compensation is now tied to meeting financial goals at the corporate and facility level. Further portfolio realignment is expected, with asset sales to reduce debt as well as joint ventures in selected markets.

Shares rose 33 cents, or 6.7 percent, to $5.30 in morning trading.

Weakley reiterated he is positive on long-term care companies such as Sun Healthcare Group Inc. and Skilled Healthcare Group Inc., both of which he rates at "Outperform." He noted that Medicare's push of patients into lower-cost skilled nursing facility beds is as inexorable as ever, and recent reimbursement recommendations have been favorable for the industry.

Shares of Sun edged up 14 cents to $17.78, while Skilled Healthcare dipped 26 cents to $13.74.

He rates psychiatric care provider Psychiatric Solutions Inc. "Underperform," due to heavy debt levels and increased pressure on its return-on-investment capital. Weakley suggests management should turn focus from acquisitions and more toward improving internal operations and its balance sheet.