Stock Mart: MedPartners

MedPartners is trading at around 16 times projected 2000 earnings, compared with competitors, trading at 31-35 times earnings.
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MedPartners

(MDM)

is one of the great 1990s disasters.

Launched in 1993, MedPartners was a physician practice management, or PPM, company. Once upon a quaint time, there was this idea that doctors should group together to win contracts from and influence large managed-care companies and insurers. To make a long story short, this didn't work. Medpartners didn't work worse, mainly because it tried to be the prime minister of the PPMs, buying everything in sight and screwing up miserably, a story memorably chronicled in late June by

Fortune

in its article,

Vulgarians at the Gate

. The article is worth it just for the aerial shot of MedPartners founder Larry House's gargantuan mansion with guitar-shaped landscaping. Know that Elvis had nothing on this guy.

In late 1997, MedPartners stock rested nicely in the high 20s and had even spent some time in the 30s. In October 1997,

Phycor

(PHYC)

, the leading physician practice management company of the time offered to buy the company for $6.8 billion in stock. Early in 1998, the deal fell apart, and MedParters began a slow descent a low of 1 5/8. Executives' heads rolled. Debt piled on. The company had lawsuits out the wazzoo.

Talk about face lifts.

Now MedPartners is virtually out of the PPM business. It's transformed and beaten down (though not quite as much as it was), and some bold money managers are picking up some shares here and there.

MedPartners now operates

Caremark

, one of the nation's largest pharmacy-benefits managers, a PBM. Same structure of three initials; totally different thing. A PBM buys bulk prescriptions from big drug companies, thereby winning price concessions. Caremark has more than 50,000 retail pharmacies in its network and three main order distribution sites. The company has more than 1,200 clients and fills more than 40 million prescriptions a year. MedPartners didn't return a call seeking comment.

"Several months ago, it was undergoing a transformation. Now it's undergone one," says Bill Bonello, an analyst for

U.S. Bancorp Piper Jaffray

, who recently upgraded the stock to strong buy. (Bonello's firm has done underwriting for MedPartners.) "The PBM has been a hidden jewel. Investors focused on this as a blown-up PPM. Now some progress is reflected in the stock, but there's a considerable part of the market that doesn't know about it."

One Boston area hedge-fund manager has been nibbling at MedPartners, and thinks the stock could go to 12 rather easily over the next year. It closed Friday at 7 9/16, up 1/8. He expects that one of the wildly overvalued Internet health care information companies will need to sign a deal with MedPartners for access to the company's client database and, especially, its mail-order capabilities.

MedPartners should have $3.2 billion in revenue this year, analysts estimate, up 22% from last year. Earnings per share should beat the

First Call

estimate of 28 cents, according to the Boston hedge fund manager, possibly hitting 30 cents, which would be up more than 50% from last year's 19 cents. MedPartners generated cash-flow of $162 million last year, and Piper Jaffray forecasts cash-flow (earnings before interest, taxes, depreciation and amortization) of $196 million next year and $235 million in the 2001. That'll be around $1.35 per share in cash flow that year, estimate analysts.

At Friday's close and with shares outstanding of about 193 million, Medpartners has a market capitalization of about $1.45 billion, far under the price-to-sales ratio of one times sales that value players often look for. Compared with the publicly traded PBMs, like

Express Scripts

(ESRX)

and

Advanced Paradigm

(ADVP)

, the stock is reasonably cheap. According to estimates by Piper, MedPartners is trading at around 16 times projected 2000 earnings, while Express Scripts is trading at around 31 times and Advanced Paradigm at 35 times.

One nice thing about MedPartners is that it has higher margins than other PBMs, thanks to its mail-order business, large corporate clients and a therapeutic services business. The latter division helps companies like

Schering-Plough

(SGP)

monitor patients on its hepatitis C drug

Rebetron

. The company has cash-flow margins of 5.7%, compared with the Advanced Paradigm's recent 2.8% and Express Scripts' 4.2%, according to Piper's Bonello.

The PBM business is about grabbing market share, and Caremark, with its high margins, seems able to seize business by offering good deals to health maintenance organizations. It has added over $300 million in new contract revenue since the beginning of the year. In mid-July, the company added a major health maintenance organization,

Coventry

(CVTY)

to its rolls.

And now the caveats.

As the company grabs less profitable business from HMOs, its margins will go down. Also, the company has a huge debt load of about $1.4 billion. But with asset sales from the PPM businesses and the conversion of a $480 million off-balance sheet convertible financing late next year, that should fall to around $700 million to $800 million, Piper's Bonello expects. The analyst says the company's coverage ratio of cash-flow to interest payment to rise to 2.64 at the end of next year from 1.8 today -- but that's still no great shakes. Also negative: The company has negative shareholder equity because of some giant write-offs of intangibles. And while the company has settled most of the suits from the PPM days and has insurance for others, there's still some messy overhang.

But if it didn't have some hair on it, it wouldn't be such a value, now would it?