In 1981, Bill Lasky and a partner had a vision for a new form of health care.

Working as a regional manager for a nursing home company, he realized that a lot of the residents didn't need so much care and attention. So the two converted a house in Glendale, Wis., into a small group home for elderly people who needed some assistance but didn't require around-the-clock care. Almost 20 years later, that single-family residence has become

Alterra Healthcare

(ALI)

, the largest U.S. provider of assisted-living centers for frail and mentally impaired seniors.

Alterra, formerly known as Alternative Living Services, operates 369 assisted-living residences in 25 states that house around 16,000 residents. The company owns 77 of these, leases 179 and manages or owns equity stakes in the rest. Typically, assisted-living communities provide units that are similar to apartments, but with no kitchens, and a staff that helps people bathe, dress and take medicine. The units don't come cheap -- around $1,500 to $3,500 month -- but aren't as expensive as nursing homes. Alterra is also the country's largest operator of freestanding Alzheimer's care residences.

"They are the best-managed assisted-living provider, period," says Chris Bonavico, portfolio manager with

Transamerica Investment Services

, which is long Alterra. "And quality of management and service is a very rare thing in this industry."

Alterra's solid rep is reflected in its impressive revenue growth. In the first quarter, Alterra reported revenue of $83 million, up from $46 million in the same quarter a year ago. Last year, the company reported revenue of $244 million, up from $131 million in 1997. What's more, Bonavico says Alterra's facilities have high gross margins, around 40%.

But Alterra hasn't filled up its facilities as quickly as it had expected. And some investors find that scarier than a group therapy session with

Nurse Ratched

.

When Alterra reported weaker-than-expected first-quarter results on May 5, its shares plummeted nearly 50%, to 11 7/8 from 22. It earned 24 cents a share, but the

First Call

analysts' consensus was 31 cents a share. The company also warned that 1999 and 2000 earnings would be lower than expected. CEO Bill Lasky blamed the disappointing news on the company's decision to quicken buyouts of joint-venture partners, some which are experiencing operating losses. The stock closed Friday at 11 15/16, off 1/16.

Alterra officials couldn't be reached to comment.

But some analysts think the stock was beaten down too much, and at these levels they consider it undervalued. Alterra's price-to-earnings ratio is just under 11, well below the roughly 25 for its industry and about 35 for the

S&P 500

. What's more, the company trades just above its book value of $8.32 a share. Its price-to-sales ratio is 0.94. Value hunters look for stocks that trade less than one times sales.

"I think it's a tremendous value at this level," says Andrew MacPherson, an analyst with

Volpe Brown Whelan

who rates the stock a buy. Volpe has a price target of 32 on the stock and hasn't performed underwriting for Alterra.

Some insiders like the stock, too. On May 7, Alterra director Robert Haveman bought 75,000 shares for around $1 million.

Alterra also is making efforts to broaden its business. It wants to offer pharmaceuticals and medical equipment to its residents through a joint venture with institutional drug provider

Omnicare

(OCR)

.

"I think that's a huge opportunity," says MacPherson, who notes the plan is slowly rolling out. "The amount of money that flows through these facilities is enormous."

But its core business also offers plenty of opportunities. According to U.S. Census figures, the number of people over age 75 should increase by more than 24% to 16.3 million between 1990 and 2000. Because of this aging population, analysts say the assisted-living market will continue to experience 10% annual growth for the next 20 years.

"They're definitely headed in the right direction," says MacPherson.

Adds money manager Bonavico, "I just can't imagine it stays down here at five to six times cash flow."