Can Tenet Fight Off Its Many Ailments?

Shares of Tenet Healthcare (THC ), No. 2 in hospital management, have been under the weather since late October, plummeting from 50 to 14 by Nov. 11. They're now at 18. Tenet is facing government probes of its practices, including allegedly unnecessary surgery, unusually high Medicare payments for some cases, and suspicious trading of Tenet shares by insiders.

Big investors bailed out as analysts downgraded the stock when the probe was announced in October. But some pros have turned bullish, with several fund managers buying--and expecting the price to hit 40 this year. Clifford Hewitt of Legg Mason Wood Walker has upgraded the stock from a hold to a buy, emphasizing that it is for investors willing to tolerate further bad news from the investigations. He says the stock is worth 39, based on estimated earnings of $2.50 a share in fiscal 2003 ending May 31, vs. $2.17 in 2002. Earnings should drop to $1.95 in 2004, he figures--as the probes wind up--and then rebound.

Since free cash flow is expected to rise from $800 million in 2003 to $1.4 billion in 2007, Hewitt believes the financial risk from the probes is "manageable." With a shakeup in management and a new focus on internal controls, "Tenet will emerge from the crisis," he says, with its ills resolved in a year or two.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

Before it's here, it's on the Bloomberg Terminal.