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Matria's Health a Matter of Contention

The disease-management outfit has become a favorite tug-of-war between longs and shorts.

Last month, with the company's stock under heavy attack by short-sellers,

Matria Healthcare

(MATR) - Get Mattersight Corporation Report

CEO Parker Petit offered a reassuring comment that could prove quite telling in the end.

The company's CFO, Stephen Mengert, had abruptly resigned less than a week earlier. Petit responded by explaining that Mengert had left to pursue "an opportunity of a lifetime" as the CFO of another health care company that was poised for an initial public offering.

To be fair, Mengert could score big if his new employer pulls off an IPO as planned. At the same time, however, he seemed to be managing finances for a Wall Street winner already.

Notably, Mengert walked away just as Matria was reinventing itself as a pure-play disease-management firm and attracting growth-hungry investors in the process.

Late last year, Matria thrilled the market with plans to acquire CorSolutions -- an even larger DM player than itself -- and shed some businesses outside its new core strategy. The company's stock, which had spiraled toward $30 on a profit warning just two months earlier, jumped into the $40s for the first time ever. It went on to peak in mid-February at $45 a share.

Within weeks, however, short-sellers had taken direct aim at the company. By then, several Matria executives had walked out the door. Moreover, Matria was in the process of acquiring a company that had recently lost some major players of its own. And that exodus had come at a time when hopes for DM companies -- especially big ones like Matria and CorSolutions -- had never been higher.

As a result, skeptics have started to question whether Matria's new strategy is as bullet-proof as it seems. The company's stock, up 63 cents to $35.76 on Wednesday, has fallen 20% from its all-time high. It has undergone some notable one-day swings leading up to Friday morning's earnings report.

Ready for Takeoff

On Monday, with Matria sitting at $37 a share, Avondale Partners analyst Brooks O'Neil urged investors to buy the stock before it takes off again.

Matria has just announced "a series of contract signings, renewals and expansions that, collectively, represent by far the largest batch of new awards in many years," O'Neil explained. "We suspect this is the start of a string of positive news from the company that will carry these shares to new highs and would encourage investors to buy the stock now in anticipation of what could be a quick and powerful move."

O'Neil pointed to the company's first-quarter earnings release, slated for Friday, as a possible near-term catalyst. Analysts are looking for Matria to report sales of $80.6 million and earnings of 16 cents per share for the period. O'Neil expects the company to hit Wall Street's target -- without any real synergies from its recent acquisition -- and then ramp up its performance as the year goes on.

All told, O'Neil predicts that Matria will grow profits by a whopping 450% in 2006 and then another 55% on top of that in 2007.

O'Neil has made two major assumptions, however. He believes that Matria will pull off its biggest acquisition ever with great success. Meanwhile, he expects the company to divest its Facet device business -- perhaps in a matter of weeks -- and its European dialysis unit without any real hitches.

Most analysts share O'Neil's optimistic view. At least one, however, has expressed a little more caution.

TheStreet Recommends

CFO Woes

Stifel Nicolaus analyst Thomas Carroll stopped recommending Matria's stock the day after Mengert resigned and recent


finance executive Jeffrey Hinton stepped up to fill his shoes.

"In our view, the near-term risk of operational problems from the integration of CorSolutions and pending sale of Facets/foreign diabetes is significantly higher without Steve Mengert," Carroll wrote last month when reiterating his hold recommendation on Matria's stock. "Jeff Hinton, with a superior professional background, will have his hands quite full over the next three to six months -- even without the business changes at hand within Matria."

To be fair, Carroll believes that Matria has been losing key executives -- including its finance and operating chiefs -- due to a "lack of golden handcuffs" rather than problems at the company. Still, Mengert has already left one health care company in a bind.

Pediatric Services of America


hired Mengert as its CFO in the mid-1990s. With Mengert handling finances, Pediatric Services gobbled up a number of smaller firms and reported record-breaking results over the next couple of years.

But investors wound up burned with news of a shocking quarterly loss in the summer of 1998. They sued Pediatric Services and its key executives, including Mengert, for allegedly deceiving them about the value of the company's receivables. The defendants settled the lawsuit in 2002 for $3.2 million, with the company's $3 million share of the penalty fully covered by insurance. In the meantime, Mengert resigned in 1999 "to pursue other interests," and the company's stock wound up delisted by


the following year before it finally recovered.

Major Clients

CorSolutions had revamped its own management team by the time that Matria came along with a $445 million offer for the company.

"After devoting myself fully to CorSolutions as CEO for the past three years, I decided that the time was right for me to consider other opportunities," Richard Vance explained when vacating his post last August. "I know the future for CorSolutions is bright, and I am looking forward to what the future holds for me."

For CorSolutions, the future brought the loss of a major client -- Premera -- to rival



less than two weeks later. Premera dropped CorSolutions after the company came under fire for allegedly inflating its customer-satisfaction scores.

Premera's contract, worth an estimated 5.5% of CorSolutions' 2005 revenue, officially ended on Dec. 1. CorSolutions agreed to join forces with Matria shortly after that and finally opened its books to the public -- exposing additional risks -- just this month.

Based on its own disclosures, CorSolutions relied on just three customers for 44% of its revenue last year. Moreover, CorSolutions counted two of its major customers -- representing 22% of total revenue -- as company stockholders as well. Following Matria's all-cash offer for CorSolutions, however, those customers no longer have the same vested interested in the company.

Buyer Beware

Matria plans to sell two large divisions -- Facet Technologies and European-based Dia Real -- so that it can pay off some of the money it borrowed to purchase CorSolutions.

Yet buyers could be leery. Just last month, Matria found itself shelling out $10 million to settle allegations involving one of the last big companies it sold. That company, known as Diabetes Self Care, stood accused of billing Medicare for supplies that patients -- some of them deceased -- had never actually ordered.

Indeed, a former DSC insider claimed that 40% of the company's shipments were fraudulent in nature and that Petit was personally aware of the situation. Matria recently settled those claims, roughly two years after selling the company, without admitting any wrongdoing.

"You should understand that the allegations are simply that and should not be construed as fact," Petit stressed during a conference call last month. "We categorically deny any fraudulent activity."

Petit arranged that particular conference call in direct response to a negative report published by Off Wall Street.

During the call, Petit attempted to shoot down multiple concerns about Matria. Most important, perhaps, he attacked the notion that Matria had overpaid for CorSolutions to expand its presence in a commodity-like business with questionable value.

"I have been chasing this company since 2001," Petit told

in a follow-up interview last month. "I had a great deal of information before I ever saw the investment banking documents. ... It's a great acquisition."

Indeed, Petit views DM as a wonderful opportunity in general.

Companies like Matria claim to save their clients significant sums of money by managing the care of chronically ill employees while improving the health of other workers who risk becoming sick themselves. However, industry participants have used different -- and sometimes controversial -- methods for calculating just how much money they save their clients in the end.

Matria told

that it would find a client willing to discuss its own savings, but so far has failed to do so. Meanwhile, the company sees no legitimate reason why it has come under attack.

"We have to deal with it," Petit said. "Our competitor, Healthways, has been there before -- and now it's our turn. ... Any company that has the appreciation in their stock price and market cap like we have is always going to get a short-sell focus."