Is It a Safe Bet That Safeguard Will Recover?

Is all the bad news out at Safeguard Health Enterprises, the dental health care company that recently reported a big 1986 loss?

Many analysts who follow the Anaheim company think so. And many of them are becoming bullish on Safeguard stock.

Safeguard, which specializes in prepaid dental care, had been on the growth fast track until the first quarter of last year, when expansion-related losses at its chain of dental clinics caused Safeguard to take an unexpected nose dive into red ink.

Not only did profits go into the tank, but Safeguard's stock price took a beating. The stock, which traded as high as $13.25 a share in 1986, slid on successive quarterly earnings drops to a low this year of only $4.50.

Safeguard got into its bind the same way countless other companies have: uncontrolled expansion.

From just five offices in 1983, the company's Community Dental Centers subsidiary mushroomed to 40 offices by early last year. Although some of the facilities were making money, W. Bruce Steever, Safeguard's recently installed chief financial officer, admitted that the subsidiary simply grew faster than the company's ability to control it.

Stung by operating losses at some clinics--opened mainly to help sell prepaid dental plans to large clients in new areas by ensuring a supply of contracting dentists--Safeguard recently began paring money-losing offices, taking in the process a $2.8-million writedown on assets during the final quarter of last year.

As a result, Safeguard had a full-year loss of $1 million compared with a $3.4-million net profit for 1985. For the fourth quarter, the net loss was an even more numbing $2.4 million compared to net earnings of $970,000 a year earlier.

Despite the writedown and operating losses at the clinics themselves, Steever said Safeguard's core business--its dental HMO--continues to be profitable. Losses at the Community Dental Centers (CDC) subsidiary will continue this year, but Safeguard itself expects to make money during the current quarter and to stay profitable all year, Steever said.

Worst Viewed as Over

Analysts, including Randall Huyser of San Francisco-based Montgomery Securities Inc., agree that Safeguard appears to be on the mend. "I think the dental centers will continue to lose money for the next few quarters, but I think the worst is already out," Huyser said.

Generally, Wall Street is looking for Safeguard to earn between 30 and 45 cents a share during 1987. Based on Safeguard's nearly 7.7 million common shares outstanding, that translates to net earnings of $2.3 million to $3.5 million.

Steever said Friday that while the estimates represent "a pretty broad range of numbers," Safeguard is comfortable with them. "How well we do depends on our ability to get CDC under control," he added.

HMOs are getting to be old hat, but 12-year-old Safeguard still is the dominant force in the dental segment of the business, analysts say. During 1986, Safeguard's total membership increased 23% to 850,000 people in 12 states.

Climbing Membership

During 1987, the company's membership will increase another 18% to 21% to more than 1 million members, said Dorothy Ryan, of Swergold, Chefitz & Sinsabaugh. As a result, she said in a recent research report, Safeguard should be able to earn 50 to 55 cents a share in 1988.

Based on those 1988 earnings estimates--which are at the low end of the spectrum compared to the 65 to 70 cents a share other analysts expect Safeguard to earn--Safeguard stock is trading at only about 12 times its estimated 1988 earnings.

Because of Safeguard's earnings potential, the stock looks "cheap" at its closing price Friday of $6 a share, said Stephen Reid, health care analyst for Wedbush Securities of Los Angeles. Strong earnings this year could push Safeguard into the $12-a-share range "within a year," Reid said.

Huyser, of Montgomery Securities, is more cautious and declines to make any projections, either of how high the stock could go, or of how long it could take to get there. But strong earnings during the first and second quarters, Huyser said, "should be enough to start the stock rolling."

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