IPC the Hospitalist Co. Inc. has been a favorite of investors, but its shares fainted last week after the North Hollywood company warned that fourth quarter results likely wouldn’t meet Wall Street expectations – for the third consecutive quarter.

The company was the largest decliner on the LABJ Stock Index last week, losing roughly one-third of its value for the week ended Jan. 11 (see page 22). Shares closed at $32.30 that day after dropping as low as $29.70 earlier in the week.

“IPC is now a show-me story – they have to do better in the first quarter,” said analyst Kevin Campbell at Avondale Partners LLC in Nashville, Tenn. “Investors have to be convinced that management’s solutions will work, and the problems are only temporary, and not what we’re going to see from now on.”

IPC is the nation’s largest operator of hospital-based physician practices. Hospitalists are doctors who manage hospital patients’ care in coordination with the patients’ primary care doctors and specialists. The goal is to have a doctor on site so a patient’s doctor doesn’t have to come to the hospital as frequently.

Since going public in 2008, IPC has grown rapidly through acquisitions and by creating practices at hospitals. IPC has about 1,200 physicians in more than 900 facilities in 25 states. Still, the company only has about 5 percent of all 33,000 hospitalist doctors in the United States under management, so there’s room to grow.

Last year, the company completed 11 acquisitions of other hospitalist practices, five of them in the fourth quarter. That expansion rate made the company a darling among investors and mutual funds looking for aggressive growth returns.

Analyst Brooks O’Neill at Dougherty & Co. Inc. in Minneapolis noted that IPC stock always has been volatile, generally jumping between $15 to $35 during its first two years, and briefly rising above $50 on occasion last spring and summer.

“The business is not broken, but investors have a shorter and shorter trigger these days,” O’Neill said. “I think we saw a big turnover in investors (last) week, and whether they will come back is uncertain.”

Temp costs hurt

Part of the company’s problems stem from some guarantees made in contacts with large hospitals that IPC would staff hospitalists around the clock. That put the company on the hook for hiring higher-cost temporary or freelance physicians if any of its staff hospitalists unexpectedly quit.

After those temp costs hurt its second and third quarter results, executives decided they would no longer sign contracts with such guarantees unless the hospitals share extra costs. The company is renegotiating existing contracts to that end. Chief Administrative Officer Devra Shapiro said that the company would not be shy about ending contracts if hospitals didn’t agree to new conditions.

A second factor was that the usually robust fourth quarter didn’t show the activity of past years. Shapiro, who has been with IPC since it was founded in 2000, said the quarter has traditionally been the company’s momentum period, with a surge in billable patient encounters sometime during the three months that generally made up for any slowness earlier in the year.

But in the most recent quarter, the surge never came and there actually was what the company called softness in the numbers at some hospitals. Because IPC was scheduled to appear at a San Francisco investor conference last week, the company decided to prerelease revenue and earnings prior to the event before executives had a chance to analyze its data. IPC expects to officially report earnings in March.

“We believe these renegotiated contracts, and the new ones we’ve been signing, will be good contributors to the company (this) year, so we do consider what happened last year to be a blip,” Shapiro said.

IPC said it expects to report fourth quarter earnings per share of 47 cents to 51 cents

and revenue of $115 million to $118 million. Analysts surveyed by Thomson Reuters on average have been expecting earnings of 54 cents a share on revenue of $124 million.

For the full year, IPC expects to report earnings per share of $1.70 to $1.74 and revenue of $455 million to $458 million. It previously forecast per-share earnings of $1.78 to $1.86 and revenue of $463 million to $465 million.

All-time highs

Chief Executive Adam Singer noted the number of providers added in the latest quarter met the company’s expectations and said its patient encounters, estimated net revenue and number of staff doctors for both the full year and fourth quarter are at all-time highs for the company.

“We expect that our larger provider work force and new practices will position us well in 2012,” Singer said last week during a conference call with analysts. “Historically, we’ve seen increased census at our facilities in the first quarter and we expect this seasonal trend to continue in 2012.”

Four analysts – including Campbell and O’Neil – cut their recommendation on the stock from “buy” to “neutral” after the warning.

“Even so, I am reasonably optimistic,” O’Neil said. “We revised our estimate to say 15 percent earnings growth is conservatively realistic for 2012. If they can do that or even better, the stock price will recover.”