B.S. in finance,
University of Virginia's McIntire School of Commerce
. Lawson has been covering the health care services sector since 1992. She joined
Salomon Smith Barney
in April 1999 from
, where she had worked since March 1997. Prior to that she was at
Morgan Stanley & Co
Industry Outlook and Style
After a difficult period in the late 1990s, hospital stocks began to come out of their doldrums in 2000. As Lawson sees it, the group is headed into an environment of predictability and less volatility. For most of the '80s and '90s, she explains, Medicare spending grew reliably at 9% to10%. By contrast, 1998 saw it grow by only 1.5%, while 1999 faced a decline of nearly a full percentage point.
"But now I think we're in a period of time where the two major payers, which are the government and private insurance or managed care, are finally having to pay their fair share and get back to a reasonable amount of predictability, which I think is the key here," says the analyst. As she sees it, the government's need for a stable environment on the provider side should create a more desirable climate for investors.
Another element she sees coming into play is an increase in health care spending as baby boomers age. Studies show that as people enter their 50s, there's an increase in per capita health care spending. "We happen to have a significant portion of the population hitting that age category at the same time that we believe the impact of managed care is diminishing," says Lawson.
As people increasingly seek alternatives to restrictive managed-care programs, she says that HMOs "have basically pulled out of the business of managing care, and we think that will also have a favorable impact on utilization."
But the aging population does not ensure good times for nursing homes in her view. She remains cautious on the group, due largely to her concerns about the Medicaid reimbursement environment for these providers.
In the hospital sector, though, Lawson projects that the favorable payer environment, coupled with the increased spending, should translate into high-single-digit top-line growth. This should result in fairly predictable midteens earnings growth. And those companies that are more active in the acquisitions arena could see earnings growth go even higher.
This growth will occur, she says, regardless of the economic environment. "I don't think you could find another sector in the economy right now where you can say, 'I know what my pricing's going to be next month,' and you can say that about the hospital business," says the Salomon analyst. For investors seeking an attractive return and predictable growth rate, she believes this is a good area of the market in which to put your money. While stock prices will be influenced by the economy, earnings growth for these companies should not be, Lawson notes.
The most significant concern for the Salomon Smith Barney analyst: labor issues, particularly the growing nursing shortage. "It's not a matter of a softening economy creating more workers -- there just aren't enough nurses."
Her top picks for the group are
. She likes HealthSouth particularly for its upside in the near term, as she feels the company has lagged behind the group in recovering from some of the problems of the past few years.
HCA she hails as "probably the best steady-as-she-goes, year-in year-out" company; she observes that they reliably hit their numbers. In addition, she says, they have some of the best assets in some of the best markets of any of the publicly traded companies. Lawson expects "not a tremendous amount of upside surprise but very limited downside surprise."
Favorite stock for next 12 months:
"HealthSouth is about a year behind other publicly traded companies in terms of their recovery from some of the problems of the last couple of years. I think they addressed some of those issues a little bit later, and I think they're coming out of that down period a little bit later, so I still think they're on that upward swing coming out of the doldrums of the last few years.
"Also, about half their revenues come from a division that owns and operates rehab hospitals, and there's a pretty significant Medicare reimbursement change pending with how those hospitals get paid -- we are actually contrarian with regard to this particular situation -- we think it is going to be a very good thing for HealthSouth. This is a great opportunity to buy the stock, since people are worried about the issue."
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Rice: Manor Care