The reports from both NCES and NOV were good. The only problem that I saw is the lack of same store growth in outpatient rehabilitation. But if the company can maintain its successful acquisition activities, there should be no problem. The general, ongoing concern I have had with NOV is its relatively high debt and interest. As long as business is good, the debt won't be a problem. But should business conditions become poor, or should the company's growth slow substantially, the debt and interest would have a materially adverse effect on operating results. One reason for the high debt is that the acquisitions are paid for with cash, rather than stock. Although it's nice to see the shares outstanding remain the same for several years, I'd almost rather see debt go down and shares go up. In fact, it's possible that NOV could offer enough stock in a secondary to eliminate all debt and not significantly dilute EPS. This could happen because the dilutive effect of additional shares (perhaps a 30% increase in outstanding shares)_would be offset by the elimination of interest payments. A year ago, I mentioned that this could be done fairly easily at a price in the low teens. Unfortunately, due to the rapid accumulation of debt, such an event would require a much higher share price. In order for any such maneuver to be non-dilutive, the stock price would have to be ~90% higher than today's price. If such an unorthodox decision were made, the market would probably knock the stock down several points, thereby affecting the offering price. This would adversely affect the deal, making it less effective. It's strange how the market works.
Anyway, I don't expect NOV to do something like that. I'd rather see some kind of refinancing of the long-term debt, exspecially the 5.5% convertible debentures due in 2000. With the low interest rates these days, it makes no sense to have such high yield notes outstanding.
Todd |
