Having grown up around the medical profession, I can't say that I have that aversion to hospitals that many people seem to share. Nevertheless, I can understand why some investors decided to check out of Triad Hospitals
Results for the third quarter seem generally mediocre to me. Revenue was up more than 9%, but inpatient admissions were down 1.4% on a same-facility basis and adjusted admissions were down 2%. Although these numbers were hurt by the hurricanes, a change in admission criteria from an insurer, and the impact of a new facility in the Tucson area that isn't included in the same-facility calculations, I just don't see a lot of strength here. At the bottom line, earnings from continuing operations were up about 12.5% on a per-share basis -- not terrible, but not great either.
Not helping matters any, doubtful accounts were up to 11.2% after excluding self-pay discounts, and the company raised its allowance for doubtful accounts for the remainder of the year. This is a key problem for hospital operators; they have to provide services irrespective of the recipient's ability to pay. Not only is there not much that a hospital operator can do about it (other than build up profitable non-hospital operations), but it takes a bite out of earnings all the same.
Apart from the lowered admissions guidance and increased allowance for bad bills, I'm not a huge fan of this overall sector. Insurers constantly push for lower costs and the government (at the state and federal levels) can wreak havoc with Medicare and Medicaid. What's more, doctors don't come cheaply -- and neither do the newest technologies or drugs. All in all, that can make it tough to earn an attractive long-term return on invested capital.
As I said last quarter, I like the fact that Triad focuses on smaller communities to help reduce bad debts (at least compared with urban hospitals) and isn't afraid of being innovative with its self-pay discounts. But the more I look into this company and this stock, the more concerned I am. The return on invested capital is low and below the cost of capital, which gives me reason to pause about the company's longer-term prospects. Although I may like Triad better than Tenet
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).