Analyst: Look for hospitals to beat in Q1

Avondale researcher sees potential for higher price targets soon

Hospital companies should post solid first-quarter 2010 earnings — with a few positive surprises — according to one industry analyst.

In advance of the sector’s quarterly reporting kickoff on Wednesday, Avondale Partners' Kemp Dolliver wrote in a research note that the investment banking firm is expecting several hospital companies, including locals Community Health Systems (Ticker: CYH) and LifePoint Hospitals (Ticker: LPNT), to report Q1 earnings-per-share above the Street’s consensus.

Across the industry, strong volume growth in March should offset weather-related weaknesses in January and February, and bad debt expense should be "surprisingly tame" while operating expenses are held tightly in check, he wrote. For the sector, Avondale is predicting Q1 average earnings-per-share growth of about 14 percent year over year on revenue growth of 7 percent.

Specifically, Dolliver is looking for CHS to beat EPS expectations by 3 cents per share, at 77 cents. LifePoint could beat by 4 cents per share at 79 cents, based on Avondale’s slightly higher-than-consensus EBITDA estimate for the company — $131 million compared to $129 million — and a prediction of a flat depreciation and amortization expense. The companies report earnings after markets close on April 21 and April 29, respectively.

Avondale rates CHS at ‘market outperform’ with a $44 price target and LifePoint at ‘market perform’ with a $38 target.

Also today, Goldman Sachs downgraded LifePoint from ‘neutral’ to ‘sell,’ apparently worried about rising unemployment in the company’s rural markets.

Dolliver wrote that Avondale is positive on the sector long term and said it sees the potential to raise price targets following Q1 results.

“The stocks have rallied following President Obama’s signing of the health care reform law on March 23, 2010, which should lead to long-term improvements in the industry’s fundamentals, particularly related to bad-debt expense. The bill also provided long-term visibility on most elements of Medicare reimbursement.”