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: As much as the 20% we paid in the indemnity insurance days?

Mr. Murphy: Almost. But every year I see the co-pay and deductible on my own health coverage increasing. I also noticed that my policy just went to a three-tier drug coverage system. This will continue. Allow me, if you will, to summarize my thoughts on the longer-term macro outlook for the healthcare industry in the US.

TWST: Of course, please go ahead.

Mr. Murphy: I believe that we are moving at glacial speed away from defined benefit programs and toward defined contribution programs. Healthcare payors are attempting to allocate more of the healthcare costs to the user by way of higher co-pays, deductibles, tiered drug programs, etc. Hopefully, as users take on more of the final costs, they will become more cost-conscious in terms of their healthcare spending. Both the managed care and government programs seem to be moving in this direction while the larger self-insured employers have reacted slowly. In the case of these large self-insured employers, the need to retain their better employees is paramount, and while increasing healthcare costs are a concern, it is not an issue worth provoking confrontations. I have wandered somewhat so let me return to the hospital management industry. The demographic factor would tend to indicate that the industry should experience 1%-2% admission growth over the next several years while revenues per admission should grow in the 3%-5% range on a sustainable basis. Also, the acuity level of admissions is improving, which should help revenues.

TWST: Is this a good place for investors to be for the near to intermediate term?

Mr. Murphy: It is as long as the industry has relative earnings momentum. Sometime in 2002 other sectors of the market will appear capable of generating earnings growth in excess of 20% and will assume the relative earnings growth leadership. At that point the hospital management stocks could begin to struggle and should be sold. However, that is somewhere down the road. I should comment on valuations. If you look at EBITDA multiples or EPS multiples based on 2002, this group is not cheap. During the last 10 years or so the group has sold at enterprise value/EBITDA multiples of about 7 times and today you’re looking at multiples of probably 8-9 times on the urban companies and over 10 times on the rural companies. I continue to believe that the group will perform well into the immediate future, but you have to be conscious of these valuations and pick your points of exit. Among the urban companies I continue to prefer HCA (NYSE:HCA). I think they have the right strategy of concentrating in selective markets and becoming a powerhouse in those markets. The management has done an excellent job in working capital management over the last several years and should continue to do so. As for the government investigation, I am hearing stories that the government programs could owe HCA over 500 million for unpaid services, which is almost the amount of the much-speculated fine that would complete the government investigation. This would be another plus for the company. The company is capable of producing 2.15 per share in fiscal 2002 and sustaining a 15% growth rate for several years. I think there is upside in the stock to the 48-50 per share area.

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.