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Nursing homes and Wall Street.

With the Dow Jones average soaring into record territory, how have the nursing home stocks performed? Has the rising tide of equity prices lifted all ships and stocks? It is clear that the increase in equity values is related to reduced interest rates which lifts the price-earnings multiple. Therefore, with the decline of long-term interest rates from 9 percent at mid-year 1991 to the current 7.5 percent, the result is that investors are willing to bid up the value of earnings. The effect of this in the nursing home group is that many stocks are selling at over 20 times 1991 earnings, a rise over the recent past. Also, the appeal of these stocks is enhanced because they are considered recession-resistant, with several offering high dividend yields. Finally, several companies, such as Beverly, are successful turnarounds and the stock market is beginning to recognize the recovery.

The Earnings Outlook

The major public companies that own and manage nursing homes have just released lease earnings for 1991. Many are inline with projected results made in the fourth quarter. Analysts have begun to sharpen their pencils in predicting 1992 earnings. The consensus among analysts is that earnings in the group are projected to climb at least 15 percent over 1991, as many companies are offering increased treatment and diagnostic services and experiencing higher occupancy rates. As part of expanding services, nursing homes are providing intravenous therapy services, nursing for recuperating surgical patients, and care of chronically ill and acute care patients, all of which are adding to revenues and earnings.

The Companies

Beverly Enterprises has restructured its debt and has emerged again as a major force in the industry. After several years of deficits, topping out a $25 million in 1987 and falling to $7.5 million loss in 1989, the company posted black ink in 1991. It earned nearly $30 million in 1990, as its debt was sharply reduced and its operations were consolidated and efficiency improved. Earnings in 1991 were recently reported at $0.37 per share, up from $0.19 from a year ago. Analysts are projecting another strong gain in 1992, at $0.50 to $0.55 per share: also, long-term debt is expected to fall below $600 million and net worth rise. David Banks and his team are getting better marks in Wall Street and the stock is being recommended by several brokerage houses as an undervalued equity.

Health Care and Retirement Corporation is an older wine from a good year in a new bottle. It came public in October 1991 at $17 per share and was bid up to a high of $23 per share settling back to a premium of $20 per share. Recently, reported earnings for 1991 of $1.10 was sharply above 1990 level of $0.73 per share. Profitability rose as occupancy rates increased and services were added. In addition, service rates increased and the number of private-pay residents rose. Analysts are projecting another 15 percent to 20 percent increase for 1992. The company is expanding specialty medical services and adding facilities in regions with above average income. This is resulting in growing occupancy of private pay residents who can afford enhanced services. Paul Ormond, with many years with Owens Illinois at a senior executive level, and Dr. Keith Weikel as the COO, present a well tested management team.

Manor Care has returned to stock market levels achieved in 1986, as profits have accelerated and multiples have expanded. The company earned $0.84 per share in fiscal (May) 199 1. Earnings for the first half of fiscal 1992 are up 30 percent. Fiscal 1992 earnings are projected at $1.10 per share, with a further increase of 15 to 20 percent projected in fiscal 1993. The company has attracted Wall Street interest because of the high proportion of private pay residents, representing about 55% of total nursing home occupancy (and over62% of its revenues). The company has recently taken its subsidiary Total Care Pharmacy Services public, raising about $35 million for about 20 percent of equity in this operation. The company operates Choice Hotels International, the largest lodging franchise company. This subsidiary is obviously more cyclical but would benefit from a pickup in economic activity and therefore travel. The message from Manor Care is that emphasis on private pay combined with expanded services are boosting earnings despite the recession.

New Issue Market Hot

With a strong stock market, brokers are able to underwrite new issues. In the last six months, several nursing home and acute care facility companies have sold new shares to the public. GranCare came public in late October 1991 at $10.25 per share. It is now priced in the over-the-counter market at a whopping $17 per share, with an exceptionally high multiple. It operates 60 long-term health facilities with 7,843 beds located primarily in California. With the acquisition of 48 nursing homes from December 1990 to September 1991, the company returned to profitability after several years of losses.

Nursing Home Prices Scorecard

Like other sectors of the American economy, nursing home bed prices have been declining. They peaked in 1987, at $33,000 per bed, as the Beverly Enterprise-factor in purchases abated. They fell to a bit over $22,000 per bed in 1989, recovering somewhat in 1990 to just over $25,000 per bed. These numbers are from a report of Irving Levin and Associates, Inc. which concluded that even in a buyers' market, there was some bidding for quality properties. This resulted in some recovery in 1990 and possibly in 199 1.

Averages may confuse more than they reveal. In the period 1986 to 1990, almost one-quarter of the transactions were at under $20,000 per bed, and another 40 percent were recorded between $20,000 to $30,000 per bed.


Arthur Stupay is a well-known investment analyst and banker. He was chosen by Institutional Investor magazine as a member of its All-American Team of Analysts for 15 consecutive years.
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Title Annotation:nursing home stocks
Author:Stupay, Arthur M.
Publication:Nursing Homes
Date:Mar 1, 1992
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