B.A. in economics, B.S. in management,
Rhode Island College
State University of New York at Buffalo
. Weakley joined
in 1999, where he covers health care facilities. Prior to that, he followed the same sector at
from 1996 to 1999.
Industry Outlook and Style
(Note: Weakley was unavailable for an interview: The comments that follow are taken from his Jan. 22 research note, except for his stock picks, which he gave us by phone.)
When Weakley assesses the health care facilities industry, timing is everything. "Despite our bullish long-term thesis on the group, we continue to believe that, in the short term (six to 12 months), hospital stocks will likely continue their volatile ways," he writes.
In the latter half of 2000, he explains, hospitals benefited from a "flight to safety" as corporate earnings slowed and future economic growth became less certain. But with two
Fed rate cuts in January and others likely to come, he says that hospital stocks will likely suffer from investor rotation because growth stocks tend to become attractive in an environment of easing rates.
Another risk cited by the Bear Stearns analyst stems from the shortage of skilled nurses. Tensions have been mounting between hospital managements and skilled workers as fewer staff members are being assigned longer hours and more shifts, resulting in the threat of labor strikes and demands for better wages and benefits. "We believe that accelerating labor costs could slow or even reverse the group's
EBITDA margin expansion momentum in the future, especially if hospitals lose their fair share of battles with skilled workers."
On a positive note, however, Weakley predicts that hospitals this year will see a 3% increase in Medicare reimbursements and between 5% and 8% more from managed care. This should offset his projected 4% rise in hospital employment costs.
Projecting pricing for 2002 is a tougher call, Weakley acknowledges. Due to the tight labor market, managed care was able to get 10% and 12% premium increases for 2000 and 2001, respectively. If the current economic slowdown continues, he writes, these companies will be unlikely to secure similar increases.
Still, the analyst sees a promising outlook for cash flow growth long term. Noting in his report that the last hospital group outperformance cycle lasted about five years (from March 1993 to April 1998), Weakley observes that the sector's phenomenal performance in 2000 drew some parallels with the first 13 months of the '93-'98 cycle. Despite the group's lower cash flow ratios and EVA (economic value added -- a measure of economic profit derived from profits minus the cost of capital) metrics this time around, he cites several factors that in combination should improve the sector's numbers. These include legislation to guarantee prompt payment, the Health Insurance Portability and Accountability Act and a movement toward contract simplification between hospitals and managed care companies.
The companies Weakley says are best-positioned in the current climate are
HCA - The Healthcare Co.
Universal Health Services
. (Bear Stearns has had investment banking relationships with both companies within the past three years.)
Favorite stocks for next 12 months:
Large-cap pick: HCA
Mid-cap pick: Universal Health Services
HCA: As of early February, HCA was trading in line with the bellwether group's
price-to-earnings ratio average of 20.5, but at a discount to its peer average for EV/EBITDA (8.6 times vs. 9.3 times), notes Weakley. "We believe that the group's EV/EBITDA valuation will improve from these levels over the course of this year due to our outlook for improved cash flow and return on capital metrics for the industry. We also believe that investors will come to appreciate the company's ability to produce solid operating results in all types of environments, and thus, HCA's valuation should improve from these levels." He expects a return of 20% or more for HCA within the next 12 months and "would buy aggressively on any weakness related to money flow," he says.
Universal: "Universal Health is clearly hitting on all cylinders, as its above-average revenue growth is being driven by both solid internal dynamics and opportunistic acquisitions. Furthermore, the company's disciplined cost-control initiatives, combined with operational enhancements made at recently acquired facilities, are contributing meaningfully to bottom-line growth."
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