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

To: John O'Neill who wrote (313)	6/30/1998 9:50:00 PM
From: Todd D. Wiener	Respond to of 420

John- The negative outlook for Medicare's impact on rehab companies is the explanation for NOV's low valuation right now. However, the company has taken numerous steps (outlined in recent SEC filings and press releases) to prepare for the new environment (I believe some changes take place on July 1). NOV will not be a scorching growth stock in the future, but core sales growth (excluding the effect of NCES' growth) should be 15-20% for the next several years. Expected margin improvement from integrated delivery systems with other health care providers, cross marketing opportunities with NCES, strengthening of the installed market base of rehab offices, operating efficiencies, accretive acquisitions, and a shift to more profitable business segments should promote core earnings growth of 20-25% annually for the next several years. Adding in the tremendous growth of NCES' PEO business, and revenue growth will be nuch higher, although the effect on earnings will be much less significant. The company is trading at about 10 times forward earnings (when backing out the ownership of NCES stock, which represents $3 in NOV stock right now). Even though the company has been accumulating debt, it expects to leverage itself to 50% debt to capital, similar or less than its peers. The recent acquisitions have been made with cash and notes, because NOV believes that its stock is undervalued enough to preclude using stock for transaction. It considers the high teens as a fair place for the shares to trade. Quite simply, I believe that NOV is among the best investments in its industry group, based on management strength, brand-name awareness, growth prospects and valuation. The stock should reach the mid-high teens by year-end, but only if Wall Street is comfortable that NOV can profit in the new payment environment. Todd