Analyst Shares Her Favorites in Health-Care Field
H ealth-care stocks have been one of the market’s hottest groups during the past six months, and they show no signs of slowing down. In fact, many health-care bulls believe that the stocks can only get stronger during the next few months. Earnings disappointments in the broad market probably will send more investors hunting for companies that deliver consistent profit growth--and the health group fills that bill.
What’s worth buying now? Here, health-care services analyst Rae Alperstein of Kemper Securities Group (parent of Los Angeles brokerage Bateman Eichler), who has followed the industry for 10 years, shares her top ideas:
Question: You follow mostly the hospital and nursing home stocks and the medical-property real estate investment trusts, or REITs. What’s driving these stocks?
Answer: The fundamentals of the industries have really been improving. In the nursing home sector, the companies are benefiting from strong reimbursement rate increases, particularly from Medicaid. You’ve also got an aging population and minimal new construction of nursing homes.
Q: Beverly Enterprises is still your favorite nursing home firm, which you expect to show 68% earnings growth this year and 56% next?
A: Yes. Beverly, more than any other nursing home company, is benefiting from the significant increases in Medicaid reimbursement we’ve seen in 1989 and 1990. That creates demand, which creates occupancy.
Q: What about the hospital stocks?
A: The acute-care hospital companies have been strong because only the best hospital managers survived the ‘80s and they’ve developed the right strategies, whatever their niche is. Unless you’re really a strong manager, you’re not around.
I see National Medical Enterprises (based in Santa Monica) and Humana both having 15% growth rates. For NME, a $4-billion company, to be growing earnings at 15% says a lot about the industry it’s in. I like both NME and Humana, but NME is my favorite because they’ve diversified into three segments--acute-care, psychiatric and rehabilitation. So when one segment of the industry isn’t going as well, you have the others going for you. Psychiatric had carried them. Now, rehab is taking off and has been growing at 20% to 30%. The diversity of businesses makes me feel really comfortable with them.
Q: At $46.25 a share for NME, the price is 15 times the $3.07 a share you expect them to earn in the fiscal year ending May 31. You think that’s a fair price to pay now?
A: That’s right. A year from now the stock will be in the mid-$50s.
Not only are the industry fundamentals improving, but hospital labor costs also are being helped by the recession. A lot of former nurses are being forced back into the work force because their husbands have been laid off or they themselves have been laid off from other jobs.
Q: You also have been a big fan of the medical-property REIT firms, which own hospitals and other health facilities and essentially pass the rent paid by the hospital operators through to shareholders, as dividends. What’s so attractive about the REIT stocks?
A: The group has been trading at dividend yields that are way too high for the risk involved. They’ve been largely misunderstood and under-followed since their inception. These are average-risk to low-risk stocks; many actually raise their dividends each quarter because they participate in the hospitals’ revenue growth. The quality of the properties is strong. I feel very secure about cash flow growth from their existing properties as well as from new properties.
Q: What are your favorites?
A: L.A.-based American Health Properties (yielding 9.4%) owns 23 acute-care, psychiatric and rehab hospitals. The cash flow from the whole group of properties probably covers their rent three times over, so that minimizes the risk of non-payment of rent.
Newport Beach-based Nationwide Health Properties (yielding 9.9%) has about 95 properties. Almost all are nursing homes, and about 67% of those are sale-leaseback deals with Beverly Enterprises. Nationwide has the best balance sheet of the group; its debt-to-equity ratio is 6%.
A third is Universal Health Realty (yielding 10.6%), which has 13 properties. It has strong cash flow coverage, and like Nationwide the balance sheet is very strong.
Q: Last, you like Syncor International, a Chatsworth-based company that distributes radiopharmaceuticals, or drugs that allow doctors to “see” into the body for organ diagnosis and other procedures. Why Syncor?
A: I see them earning 44 cents a share in this fiscal year (ending in May) and 60 cents next year, for 36% growth. I think their strategies are going to impress people.
Q: Why?
A: This is a service business, compounding and distributing these drugs. They have new products, approved in December, which aid in the detection of heart disease. So that adds sex appeal to the story. To a great extent this stock trades like a biotech stock.
The difference between this one and the biotech stocks is that Syncor has earnings. I have a target price of $20 a share in the next 12 to 18 months (versus $13.875 Thursday).
ALPERSTEIN’S TOP PICKS
Here are the six health-care services stocks that Kemper Securities Group analyst Rae Alperstein rates highest for investors looking for ideas now. The bottom three are real estate investment trusts (REITs).
52-week Thurs. ’91 Div. Stock high/low close P-E* yld. Beverly Enterprises 11 1/4-3 7/8 11 1/8 35 -- Natl. Medical Ent. 47 1/4-31 46 1/4 15 1.7% Syncor Intl. 14 5/8-6 1/4 13 7/8 31 -- Amer. Health Prop. 26 1/2-20 26 3/8 9 9.4% Nationwide Health 21 1/2-14 3/8 20 1/4 9 9.9% Univ. Health Realty 14 3/4-10 1/2 14 1/8 7 10.6%
* stock price-to-earnings ratio based on 1991 earnings per share estimate. For REITs, the figure is based on estimated cash flow per share.
All stocks trade NYSE except Syncor (OTC)
Source: Kemper Securities Group
