For Subscribers

Get the complete article now!

Six analysts and top management from seven sector firms examine the Health Care Facilities sector in this special 64-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info386.htm

TWST: What are you telling investors about the nursing homes stocks?

Mr. Kumpel: For the first time in three and a half years, we’re encouraging that they build their exposure to the space. There are a couple of reasons behind this. Number one, the reimbursement environment is very favorable on both the federal and the state levels. Medicare rates are growing in a very visible manner. Medicaid rate increases have been as fast as, if not faster than, private pay rate increases. Number two, in a slowing economy this industry is particularly well-situated because demand for its products is noncyclical. With a slower labor cost growth component, companies have the opportunity to actually improve profitability in a slowing economy.

TWST: But haven’t the nursing homes had a lot of difficulty in finding a suitable work force?

Mr. Kumpel: That’s absolutely true. There has been a nursing shortage nationwide, and that’s an issue that needs to be addressed. But all things being equal, when there are attractive employment alternatives, it makes it that much more difficult for the nursing home operators to pull people into the industry. A slowing economy which offers fewer opportunities creates a slightly better environment than a booming economy for nursing homes to attract people into the profession. So the nursing shortage is by no means fully addressed by a slowing economy, but some of the problem is alleviated.

TWST: How would you differentiate between Beverly Enterprises (NYSE:BEV) and Manor Care (NYSE:HCR) as investments today?

Mr. Kumpel: I think they’re two different kinds of companies. Manor Care is the standard bearer, and they have been for years. Now, Beverly is a little bit more of a turnaround, so you’re buying at a discount, partly because the management team is relatively new and it’s a little thinner. They currently don’t have an acting CFO at this point and the CEO has only been at the helm for about five months now. In addition, the company has had some problems in the past with both its reputation and its operations. The company has had to overcome a year-and-a-half investigation by the federal government regarding Medicare overcharges. So there’s some hair on the story. But we think the number one positive thing is that earnings growth is a lot more visible than the Street has recognized, and certainly more than company guidance. To put it in perspective, Beverly generated $0.36 in operating EPS in 2000 and is guiding the Street to $0.40 in operating EPS in 2001. But let’s review what has happened since the end of 2000. We’ve had a Medicare rate increase through BIPA, which adds approximately $30 million a year to the Medicare revenue streams, which drops straight to the pretax line. That’s about $0.18 a share of incremental earnings power, above and beyond what they did in 2000. Second, labor costs total about $1.4 billion a year at Beverly. A slowing economy should reduce the rate of labor cost growth by 100 basis points, which could account for $14 million pretax, or about $0.09 aftertax of incremental earnings power. The company is in the process of selling its Florida operations, which have provided a significant liability exposure for them over the years. To the extent that liability reserves are reduced, investors get a greater exposure to the incremental earnings power that we talked about from Medicare and from slower labor cost growth. And finally, deleveraging of the balance sheet by perhaps $100-$150 million from the sale of Florida operations should save about $9 million to $12 million a year in interest expenses pretax and approximately $0.06 to $0.09 a share of incremental earnings power.

This special issue includes:

1) Health Care Facilities - In an in-depth (12,400 words) Analyst Roundtable, Adam Feinstein, Vice President in Equity Research at Lehman Brothers, Leslie Henshaw, Managing Director at ING Asset Management, Gary Taylor, Vice President of Equity Research at Banc of America Securities LLC, examine the outlook for the sector including, volume trends in hospitals, demographics and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at seventeen sector firms asked market insiders about the ability of management teams to create shareholder value.

3) Investing in Health Care Facilities - In an in-depth (4,700 words) Analyst Interview, James Kumpel, Health Care Services Analyst at Raymond James & Associates, examines the outlook for the sector and shares specific stock recommendations .

4) Specialty Healthcare Providers - In an in-depth (3,500 words) Analyst Interview, Peter Emch, Director-Equity Research at Credit Suisse First Boston, examines the outlook for the sector and shares specific stock recommendations.

5) Hospital Management Stocks - In an in-depth (3,300 words) Analyst Interview, Leo Murphy, Vice President-Senior Analyst at Pioneer Investment Management USA, Inc., examines the outlook for the sector and shares specific stock recommendations.

6) CEO interviews (average 2,500 words). Top management of seven sector firms examine the outlook for their firm and the sector.