Hospital stocks on life support but will survive

NEW YORK (Reuters) - Hospital stocks appear to be hovering on life support but it may not yet be time to pull the plug, even with dismal economic conditions threatening to swell the ranks of uninsured patients.

The stock performance graphs for most publicly traded hospital operators since September resemble a black diamond ski slope -- a steep drop not for the faint of heart. The declines have been more precipitous than for the broader market.

But even the likes of Tenet Healthcare Corp (THC.N) and Health Management Associates Inc (HMA.N) -- whose share prices have dropped below $2 -- are likely to survive. And investors might just reap a tidy profit if they are patient enough to ride out a slump that could last more than a year.

"The reason you own the equity in this space is because you believe that these companies are not going to go away and, if and when (the U.S.) Congress gets its act together, there will be help for the hospitals," said Sheryl Skolnick, an analyst with CRT Capital Group.

Broad health care reform with a universal health insurance component would add thousands of paying customers who otherwise use hospitals for primary care, but do not pay for it.

"Even if it (reform) is only modest, that will get the stocks moving, and once the sentiment turns positive, you could see these stocks go up two, three, four, five times where they are today," Skolnick said.

Before that happens there is likely to be some tough sledding for hospitals that are already struggling with declining admissions, rising unpaid medical bills and the likelihood of having to serve more uninsured patients as tens of thousands of Americans lose their jobs.

"Certainly the fundamentals are going to get worse before they get better," said John Ransom, an analyst for Raymond James. "Hospitals get worse six to 12 months after the economy does, so you've got probably a tough 12 to 18 months ahead of you. So it's hard to find any real compelling reason to own them at this moment in time.

"If we get any kind of universal health insurance, that is going to solve the biggest problems hospitals face," Ransom added.

His top pick in the group is Universal Health Services Inc (UHS.N), whose shares are only down about 44 percent since early September, compared with HMA, which is off about 70 percent, and Tenet, off some 80 percent in the same time frame. The S&P 500 index .SPX is down about 30 percent.

"More risk averse investors ought to look at UHS, which has the firepower to survive," Ransom said.

But even with severely depressed share prices and high levels of debt, Universal's less robust rivals are unlikely to end up in bankruptcy, analysts say.

"They do have a window," said Cowen and Co analyst Kemp Dolliver. "The more they can do to improve their earnings, even with this difficult backdrop, the more flexibility they buy themselves."

Tenet has cash on hand to burn, about $500 million available through a credit facility and no significant debt maturities until 2011, analysts said.

"There is no liquidity risk here," Skolnick said of Tenet. "As long as they don't go out and commit fraud, they're going to survive."

Tenet is also looking to unload about $600 million in assets, but severely tight credit and capital markets have hampered its ability to make those sales.

Yet those same capital markets could be a silver lining as they keep the private equity wolves at bay, stemming a recent trend of public hospital companies being taken private.

"Let's say these stocks were at these valuations, but the capital markets were fine and the private equity folks could operate as they wish," Dolliver said. "At these prices, these companies would be on the radar screens of private equity."

HMA is in somewhat shakier shape, analysts said.

It significantly added to its debt burden with a special dividend payment in 2007 and has about 25 percent of its business in particularly hard hit Florida. HMA also has two debt covenants with which it must remain in compliance or risk having its bank debt repriced much higher.

"Assuming the earnings hold up, they'll be in compliance, but they're skating close to the edge," Dolliver said. "The cushion is relatively modest."

Still, bankruptcy appears to be a longshot.

"I don't think banks would want to put HMA in bankruptcy and try to sell assets," Dolliver said. "It's more likely they would give the company some breathing room."

Tenet, HMA and Community Health Systems Inc (CYH.N), whose shares are off some 60 percent over the past three months, all must continue to rein in costs as they attempt to fill beds with paying customers, Skolnick said.

"They have to be staffing and aligning cost to patients they have, not the patients they want," Skolnick added.

"As bad as things are, they can only get better, right?"

(Editing by Andre Grenon)