Triad Hospitals
The negative earnings surprise was the direct result of a write-down of property carried at an inflated value on the balance sheet. It's a valuable lesson that illustrates the power of a realistic and clean balance sheet.
Triad had been expected to earn $0.47 to $0.49 per share, and deliver up to $0.16 a share after taking a disclosed charge of $0.33 related to refinancing a senior note. However, a $16.3 million non-cash impairment of fixed assets delivered a sharp blow to Triad's results. The asset in question is Alice Regional Hospital, which Triad is selling. The balance sheet value of the hospital exceeded the fair market value of the expected sales price, which triggered the unexpected charge to earnings.
Long-lived assets, including property, can become impaired -- and candidates for a write-off -- when the reported book value exceeds projected future cash flow. Alice Regional's balance sheet value was too high and had not been appropriately depreciated. Putting a price tag on it for sale apparently forced the write-down and the unwelcome earnings surprise.
While this is not illegal, it is an aggressive form of accounting. And it's a tough accounting practice for an investor to recognize and anticipate. Being able to trust and use the balance sheet figures provided by a company is critical to making good investments. Triad, therefore, failed shareholders.
Triad reiterated 2004 earnings guidance of $2.28 to $2.36 per share that will, in part, be due to a series of acquisitions and divestitures. Triad recently acquired four Arkansas hospitals from Tenet Healthcare
In spite of the confirmed guidance for 2004, investors should be concerned about the value of Triad's remaining properties. If these hospitals have been subject to the same depreciation schedule and asset overvaluation as Alice Regional was, there may be more earnings disappointments in store.
Motley Fool contributor J. Graham owns shares of HCA.