Sector Snap: Hospital operators decline

UBS analyst Justin Lake downgraded several companies, citing the broader economic worries and overall lackluster industry performance. The view contrasts with those of his peers several weeks ago, when they gave mostly upbeat outlooks for operators like Tenet Healthcare Corp., based on admissions, management and debt improvements. The stock market has since been seesawing as the U.S. government works on a rescue plan for the faltering financial sector. Meanwhile, investors remain nervous and credit markets remain tight.

Shares of Franklin, Tenn.-based Community Health Systems Inc. fell $1.88, or 6.4 percent, to $27.43 while King of Prussia, Pa.-based Universal Health Services Inc. fell $2.31, or 4.1 percent, to $53.76. Lake downgraded both stocks to "Neutral" from "Buy." Meanwhile, shares of Franklin, Tenn.-based Tenet Healthcare fell 31 cents, or 5.6 percent, to $5.24 after being downgraded to "Sell" from "Neutral."

"With our channel checks indicating lackluster industrywide hospital results in the third quarter and a deteriorating macroeconomic environment likely pressuring operating fundamentals into 2009, we are taking an increasingly cautious view on the hospital sector," he said in a note to investors.

Lake said Tenet's margin growth will likely start to moderate and he lowered the price target to $5 from $6.50. He said the long-term correlation between the health of the economy and a hospital's admissions and bad debt are undeniable.

Bad debt is the amount of debt a hospital incurs from treating uninsured or underinsured patients and has been unable to collect.

Meanwhile, he lowered the price target on Universal Health to $59 from $70. Though he expects the company to perform better than most of its peers, its momentum will be slowed by the economy and tough year-to-year comparisons, he said.

Lake lowered Community Health's price target to $32 from $42, saying the company's solid management may not be enough to overcome a weak economy.

Elsewhere in the sector, shares of Naples, Fla.-based Health Management Associates Inc. fell 15 cents, or 3.6 percent, to $4.01, while Brentwood, Tenn.-based LifePoint Hospitals Inc. fell $1.71, or 5.2 percent, to $30.46.