I continue the monologue after long discussions with RHBC IR, a review of still more company literature and a (brief) conversation with the Stevens Inc. analyst who follows the stock and has a current buy rating.
Where to start?
RHBC is THE largest provider of rehab services AND temporary therapy staffing services in the US. Competitors are Healthsouth, Horizon, Mariner, Novacare, Vencor, COHR, Emcare, and Inphynet. In the acute sector RHBC has a 60% market share with a 20% market penetration estimated by Stevens. Market share in the temp staffing business, RHBC has a 34% share and the next four largest competitors have less than that combined. Penetration is similiarly low. RHBC is targeting growth of 15-20% growth in number of hospitals served for the next 5 years.
The demographics of the 'aging of America' are mentioned in several analyst reviews of the company and growth in the rehab industry is expected to grow at 17% based on this factor alone. Market size should double by 2000.
Acute rehab accounts for 60% of revenues and it is widely mentioned that this is the portion of revenues which will be most affected by congressional action. Some stats about acute rehab: currently 850 of 5000 hospitals have such units; of those, RHBC manages 87, all others account for 58. The remainder are self managed by hospitals. Estimates for the potential market is 1000 hospitals. Hospital contracts are front loaded in that during the first year, money is usally lost and the final years are highly profitable. RHBC has a renewal rate of 80%+. RHBC has expanded its salesforce to try to expand its showing in New York and PA, two states expected to be important in coming years. Acute rehab is typically the company's 'in' to a hospital -- the first service it provides and the other business segments follow. Currently 20% of customers use more than one of RHBC's four services.
Subacute units are only 6% of revenues but are very profitable and growing quickly due the recent health industry drive to move patients quickly out. This area may be impacted by the loss of government programs which reimburse hospitals for costs incurred in opening such units. Refer to RHBC's recent medicare comments for details and outlook.
Outpatient services has been having margin problems but after 3 qurters of underperformance, the company hired a new management team that has increased margins from a low of 7% to 17%, still below the target of 20%, but it seems to be getting there. This segment is expected to grow quickly as well.
Temporary Staffing is the newest segment and represents 30% of revenue and is the 'real growth driver'. Margins are around 35%. Industry growth estimates are nutso high like 70 to 80 percent by year 2000. Again RHBC dominates this market over all competitors. Offices are opening so quickly that margins may experience some decline in the short term, but they should remain intact longer term.
The only risks I have seen or heard are 1) changes to acute units payments because of medicare and the low liquidity of the stock because of the lousy trading volume.
Summaries of analyst reports from Stephens, JWCharles, Cowen, Pauli&Company, and Prudential are (respectively)
Rating: 1,1,2,1,3
Target Prices (6-18mo): 40, 40, n/a, 41, 36
Earnings Estimates (97):
1.97, 1.85, 1.88, 1.91, 2.17
Earnings Estimates (98)
2.37, 2.30, 2.55, 2.25, 2.40
I note that all of the estimates underestimated the EPS for the most recent quarter. Reports were issued in May (except for Stephens in August).
There was a repurchase of 20% of the outstanding shares authorized in February. As of August, about half of that authorization had been exercised.
If anyone has anything to add or any comments, let me know. I am going to find a way to purchase this one. I would like to take a fairly large stake.
J |
