Westworld Tells Analysts to Cut Profit Prospects : Estimates for ’86 Earnings Drop by 15 Cents per Share

Westworld Community Healthcare Inc. confirmed Wednesday that it has told securities analysts to lower their earnings estimates for 1986.

The hospital company, which specializes in serving rural communities, said it is feeling the pinch of recently enacted federal legislation that temporarily provides for lowered Medicare reimbursements in certain states.

Although net earnings for 1986 will still be well above last year’s 48 cents per share, the Lake Forest company said, it is telling the investment community to reduce earnings estimates of 70 to 75 cents a share by 15 cents, said Michael Dunn, chairman and chief executive.

For 1985, Westworld posted net income of $3.5 million. Based on the company’s advice to the analysts, Westworld’s net earnings during 1986 are likely to range between $4.4 million and $4.8 million. The company has 8.1 million shares of common stock outstanding.

Westworld’s common stock has taken a beating in recent weeks. Since April 1, the company’s stock price has slipped nearly 50%, from $14 a share to $7.12 1/2 a share at the close of trading Wednesday.

On Tuesday, Westworld fell $1 to $7 a share on heavy volume of 775,000 shares. Dunn said he believes that the New York brokerage house of Morgan Stanley sold a single 500,000-share block that day. A spokesman for that firm declined to comment.

During the most recent 12 months, Westworld, which is traded over the counter, has sold for as much as $17.50 a share.

Under Medicare rules, hospitals receive reimbursements for treatments calculated by formulas based on the types of illnesses. If the cost of treating a patient is more than Medicare will pay, the hospital is forced to write off the difference. Medicare payments account for about 28% of Westworld’s revenue.

The temporary rules, enacted last month, will lower Medicare payments in certain states. Those provisions will expire, however, with the end of the federal fiscal year in September.

The number of non-Medicare patients at Westworld hospitals tends to drop in the spring planting season, Dunn said, so that the bulk of the 1986 earnings shortfall will be felt during the current quarter.

“We expect very firmly that the worst of it will occur during the second quarter and earnings will be down from last year,” he said. “There isn’t much tourist trade, and the farmers are all planting corn.”

During the second quarter of 1985, Westworld posted net earnings of $782,000, compared to net earnings of $275,000 a year earlier. Results for the first quarter of 1986 have not been released yet but “will be up very nicely,” Dunn said.

Westworld also is experiencing an increased number of bad debts incurred by patients unable to pay their bills. Bad debts rose to about 9% of revenue during the first quarter, up from 8% last year, Dunn said.

“It’s not a lot, but it’s more than we’d like,” Dunn said. He said that weak rural economies and a depression in Texas caused by falling oil prices account for the increasing numbers of indigents being treated at Westworld hospitals.

“Our facilities often are the only hospitals in their areas, so like the county hospital, we have to take all comers,” Dunn said.

Still, commented Larry Selwitz, a health care analyst for the Los Angeles brokerage house of Bateman Eichler, Hill Richards Inc., non-payment is to be expected in rural areas, where many workers are either unemployed or underemployed.

“These guys knew what they were getting into,” Selwitz said. “What the hell do you think you are going to get in a rural area?”