This was forwarded to me by a reader, and it teases us about a company that is getting “windfall” profits from “Healthcare’s Dirty Secret” — which is, according to this ad teaser from Investment U, specialty hospital beds, and especially psychiatric beds.
According to the ad, “these beds represent a health care gold mine. Right now, every one of these beds can generate a whopping $210,240 per year!”
I think we can probably agree with that as investors — I’ve seen successful companies in this specialty bed business all over the place, from neonatal units to prison hospitals to emergency rooms. It sometimes seems like hospitals are just becoming medical malls that are filled with subcontracted businesses. But that’s just my little aside here.
The government covers much of the cost of these companies’ services through Medicare and other programs, which is the “windfall” — and as it happens, it’s a windfall that came about very shortly after this CEO took over. [thanks to a Congressional change to Medicare policies, though the ad doesn’t state this]
And that’s part of the other sell here: The CEO himself. The ad states that he helped build the biggest hospital operator in the US with his “genius”, and that he left “at the top” to start this other company after his success with that hospital operator put Nashville on the medical map (and made the Frist family rich, which is a good specific hint).
Some other specific hints from the ad:
The company has “6,689 of them [beds] with plans to add at least 1,500 more in just 60 days.” (and the teaser threatens that you might not get in on the profits if you wait for these beds to be finalized.)
“revenues from these beds jumped an unheard-of 78% over the same period a year ago, to a record $248 million.”
“company just increased 2006 earnings guidance.” And should reach a billion in revenue “very soon.”
So from those hints the Gumshoe can extrapolate a little … the largest hospital company, which is based in Nashville, is HCA, and we all remember the problems with Senator Bill Frist and his ownership. I first thought the company teased about here might be run by Jack Massey, who was the first CEO and built the company along with the Frist family (after building his Kentucky Fried Chicken empire).
But it’s a little trickier than that. The executive who left at the top of his game in 1996 was not actually CEO of HCA but a longtime employee who helped to build the company over 20 years and was head of a major division (the Tennessee division, so he can feasibly claim that “Nashville on the medical map” stuff).
And the company he left to found? Well, perhaps you can guess it from the additional hints here, but the Stock Gumshoe can tell you confidently that it is …
Psychiatric Solutions (PSYS)
They actually increased guidance back in November, and since the ad specifies a price “around $30” that probably means this forwarded email I got is a little old. Price is about $41 now, and it was in the low $30s in November (dipped close to $30 before the guidance was upped). So Investment U probably gets credit for doing a pretty good job on this one, at least in the short term. I’ll be generous and give them credit on the spreadsheet for $33 back in mid-November, since they say it was after the guidance raise.
The company does have a bit over 8,000 beds in their portfolio now, with acquisitions coming all the time. And 2006 final results did show just over a billion in sales. The big acquisition that brought in 1,500 beds is of Horizon Health, and it’s expected to close sometime very soon if it hasn’t already.
A couple things to think about from your friendly Stock Gumshoe: This is an acquisition company above all else — they acquired ten companies/organizations in 2006 and are targeting a minimum of six acquisitions a year, which aren’t part of their guidance, so that’s probably why they trade at a pretty pricey PE in the high-30s. It’s hard to value companies that grow through acquisitions, but it is true that it’s a highly fragmented industry and they may be able to successfully keep this growth up for a while.
And there are other companies in this space — some private ones, and at least one big public one (Magellan). This isn’t a one-horse race, even if you do concede that the fragmented, local nature of the business is likely to change over time.
Personal Capital is an advertiser with Stock Gumshoe, but Travis also uses it every day for his personal accounts and finds it invaluable. Here's what he said: "They offer a great (and genuinely FREE) 'second opinion' for your financial plan, but what I love most is their automated financial dashboard -- it will look at all your assets and debts, tally up your asset allocation, project where you'll be at retirement, and suggest ways to manage risk or improve returns. It's free, I think their free tools are great, and I think it's worth checking out -- you can do so here.