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Biotech / Medical : Novacare (NOV) breaking out... -- Ignore unavailable to you. Want to Upgrade?

To: pham who wrote (278)	5/1/1998 9:56:00 PM
From: Todd D. Wiener	Read Replies (1) \| Respond to of 420

Possible reasons: 1. NOV is growing at a much slower pace. 2. NOV is experiencing minimal same-store growth, while NCES is able to grow internally much more quickly. 3. NOV needs to make acquisitions in order to maintain 25% growth, and the market may be concerned about NOV's balance sheet. However, I saw a recent ValueLine report on NOV, and it says that NOV has excellent financial strength. 4. The rehabilitation services market is not experiencing the rapid growth that the PEO market is experiencing. 5. There are still concerns about Medicare reform and reimbursement issues. 6. NOV's margins continue to decline, but this is only a reflection of the rapid growth of the NCES subsidiary. At first glance, NOV trades at more than 18 times trailing EPS, compared with a 3-5 year expected growth rate of 19%. However, when you subtract the market value of the NCES shares held by NOV, the stock is trading at slightly more than 13 times EPS. When you factor in the depreciation and amorization, NOV is trading close to 10 times trailing EPS. That's pretty cheap, and that's why I still think the stock should trade at $20 by year-end. If NCES starts to beat estimates consistently, it could even reach $20 by year-end (60 times trailing EPS). And if NCES were to reach $20 with NOV still at $14, the core business of NOV would be valued at less than 10 times EPS. As NCES rises, NOV becomes more undervalued, because every 3 point move for NCES is worth about 1 point to NOV. So as NCES continues to climb, I suspect that it will pull NOV upward, albeit at a slower pace. Several of the aforementioned concerns about NOV are legitimate, but I still think the stock is cheap. Todd