Repost: Barron's Weekday Trader 01/15/98
(Just FYI, not on OXHP, but same industry, Thomas)
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For HealthSouth, Love May Not Last on Wall Street
Lisa R. Goldbaum
Some companies may look as if they can do no wrong. But if other stocks in
their industry are being taken out and shot, they'll need more than a
bulletproof vest to remain unscathed.
Take Alabama-based HealthSouth and its founder and CEO, Richard Scrushy.
The company, which is the largest provider of outpatient and rehabilitative
services in the country, has been a perennial favorite among analysts who
cover the group, and Scrushy, who has built a formidable empire during the
last 13 years-largely through acquisitions -- nearly walks on water, in
Wall Street's eyes.
And why not? HealthSouth's stock has been a super performer, gaining more
than 700% since 1990. The company's shareholders don't seem to begrudge
Scrushy his just reward for a job well done, either: he earned a grand
total of $27 million in 1996, including salary, bonus and stock options
exercised, and felt not a whit of guilt about it. ( "$27 Million--And Worth
Every Penny," April 17).
But all things must pass, and HealthSouth's good times may have ended for
now, as some investors have begun to back away from the stock. Why?
Principally guilt by association with a troubled industry. Meanwhile,
Scrushy has acted like an ingrate in the face of Wall Street's
unconditional love, personally unloading more than $100 million worth of
his HealthSouth stock late last year.
Though HealthSouth has had no really bad news of its own to tarnish it --
indeed, the business's fundamentals remain strong, with good margins and
solid, predictable earnings gains -- its stock has fallen by about 15%
since July, when it was trading at an all-time high of 28 15/16. The shares
closed at 25 Wednesday.
The reason is that hard times have hit health care providers in recent
months, starting back in July when the government charged three executives
of Columbia/HCA Healthcare, the nation's largest hospital chain, with
defrauding Medicare, and then launched a probe of the company's billing
practices. In October, Oxford Health Plans, a large Norwalk, CT-based
health maintenance organization, shocked analysts by announcing huge losses
because of a flawed billing system. Other HMOs, including Cigna and Aetna,
have also run into financial trouble prompted by poor cost containment. As
a result, many stocks in the sector began to crumble, pushing the Dow Jones
Health Care Providers index down some 23% since July.
And HealthSouth stock could fall even further if other health care
providers' problems worsen. "The group is vulnerable. Every time someone is
slapped on the wrist, it affects everyone," warns Marc Greenberg, portfolio
manager at New York-based Avatar Associates.
Perhaps sensing trouble, corporate insiders started dumping HealthSouth
shares: At least ten top executives sold about 4.6 million shares
altogether in November at about $26-$27 a share, according to Federal
Filings. (Scrushy himself unloaded a whopping 4 million shares at $27 per
share.) And five executives filed with the Securities and Exchange
Commission to sell 681,000 more shares, according to CDA/Investnet. The
company did not return telephone calls seeking comment.
These sales have prompted more than a little concern among big investors.
"What do they know that I don't know?" wonders Greenberg. "I hope there
isn't a smoking gun lying around." Avatar reduced its position in
HealthSouth from over a million shares to just below 350,000 back in the
third quarter of 1997, according to Vickers Stock Research. The reason,
according to Greenberg, is fear that despite HealthSouth's strength, its
stock will suffer along with all the others should the health care industry
continue to come under regulatory fire -- a prospect he finds likely.
"I have no concerns about [HealthSouth's] fundamental business, but
companies whose growth is fueled largely by acquisition have come under
pressure, and the Street is going to paint them all with the same brush,"
he argues, noting that HealthSouth's tremendous growth has been driven
largely by acquisitions. In a related case, physician management firm
MedPartners recently took a $145-million charge in the fourth quarter and
said it might report a loss of as much as 25 cents a share. MedPartners has
been criticized for making some unwise acquisitions in the past, and has
racked up more than $1 billion in debt in the process. "MedPartners didn't
understand the cost structure of some of its acquisitions," says Frank
Brown, an analyst with Atlanta-based Sterne, Agee & Leach.
Of course, HealthSouth is known for making intelligent, strategic
acquisitions and integrating them seamlessly into its existing business.
But that may not stop investors from lumping the company together with the
rest of pack. "It is understandable that investors would take a long look
at rapid consolidators," notes Brown.
Another concern is that the government's investigation of Columbia/HCA may
lead to an even broader crackdown on the managed care industry's billing
practices, which could ultimately cause even more carnage in stock prices,
Greenberg suspects.
And by some measures, HealthSouth stock might not have much more room to
run. At current levels, the shares are trading at about 22 times First
Call's 1998 consensus earnings estimate of $1.15 per share -- about in line
with its expected 1998 and five-year earnings growth rates. Scott
Abernethy, an analyst at Philadelphia-based Glenmede Trust, believes that
the stock is fairly valued at its current price. That means it could be
vulnerable to the kind of unpleasant surprises that can quickly turn love
into hatred in the fickle world of Wall Street.
BARRON'S Online Weekday Trader is located at
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