PDX looks like an overreaction to me:
The company said Friday it intends to cooperate with the FTC, but could not predict whether the investigation would have a material effect on its business.
J.P. Morgan maintained its "buy" rating on Pediatrix.
"It's premature to look at the (FTC) request for information as an acknowledgment of guilt," said J.P. Morgan analyst Matthew Ripperger, noting that the FTC approved the acquisition of Magella more than a year ago.
"Even assuming a worst-case scenario in which the company would have to divest the entire acquisition, the valuation of the stock is still compelling, especially given its very strong cash flows and no debt on its balance sheet," Ripperger said.
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But with all of the acquisitions that have taken place in the health-care- services industry in the last few years, Mr. Ripperger said the FTC is casting a broad eye to see if there has been too much consolidation. "The irony is that the FTC approved the transaction in the middle of May of last year," he added.
In the case of Pediatrix, if the FTC should force the divestiture of all of Magella -- which would be a worst-case scenario -- Mr. Ripperger said Pediatrix's stock is "still an attractive value." He noted the loss of Magella would take away 55 cents a share in earnings for a year, but Pediatrix still trades at 10 times 2003 earnings, has no debt and generates $80 million in annual cash flow.
"I think the way stock is trading is an overreaction," said Mr. Ripperger, adding, "there has been some recent insider sales that have compounded reaction to this news."
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