Safeguard Predicts 47% Earnings Drop : Quarterly Decline Linked to Start-Up Costs for 14 Dental Offices
Citing start-up costs incurred in opening 14 dental offices over the last nine months, Safeguard Health Enterprises Inc. on Wednesday said it expects a 47% decline in net earnings for the quarter ended March 31.
Following the news Wednesday, Safeguard common stock fell $2 a share to $7.75 in heavy over-the-counter trading of 905,900 shares, 11% of the company’s 7.9 million shares outstanding.
Although final results for the first quarter will not be available until early May, Safeguard, which specializes in offering prepaid dental care, said it anticipates net earnings of about $399,750, compared with $762,000 a year ago. Costs resulting from opening new company-owned offices in Ohio, Oklahoma, Missouri, Illinois and Nevada are to blame for the expected earnings drop, said Ronald Brendzel, the company’s vice president.
Anaheim-based Safeguard primarily contracts with independent dental offices, but also owns and staffs 35 of its own dental facilities. “The ultimate goal is to open up a dental office where we have a substantial (membership base). But it takes time time to build the business,” Brendzel said.
“Safeguard is a California company that is attempting to go nationwide and is running into some of the indigestion problems that occur when you are working with operations that are thousands of miles away instead of only 10 miles away,” said David Goldsmith, a health-care analyst with the San Francisco brokerage house of Robertson, Colman & Stephens.
Goldsmith said he thinks that the earnings news “took most people by surprise,” and that analysts’ earnings predictions of approximately 60 cents a share, or $4.8 million for 1986, “will get ratcheted down considerably.”
Brendzel, who in a previous interview projected that 1986 earnings would grow about 30% to $4.4 million, compared with $3.4 million during 1985, declined to make any 1986 projections Wednesday.
The soft quarterly earnings projection comes on the heels of a California Department of Corporations survey that was critical of the company. Compiled in early 1985 but apparently not released until this year, the survey says that some dental offices used by Safeguard do not abide by state guidelines requiring at least one dentist for each 2,000 patients, a department spokeswoman said.
Published reports of the study may have led to a $1.75 drop in the price of Safeguard’s common stock in trading Tuesday.
However, state officials said the findings were fairly typical for the industry and did not require any disciplinary action. “There are things to be improved, but it’s not that bad.” said Richard L. Camilli, assistant corporate commissioner.
Brendzel said the dental offices cited in the survey are not actually owned by the company, but are among those which are under contract to Safeguard.
“They (the Department of Corporations) are looking at all prepaid patients in the office, not just Safeguard’s,” Brendzel said. “I can’t control the number of prepaid patients in the office from other plans.”
The survey reportedly also was critical of Safeguard’s own internal quality control, but Brendzel said, “a lot of things can change in a year.” Among the changes, he said, was the hiring last June of a new director of quality assurance to ensure that “all the standards that are applicable are met.”
