LPNT: Are Analysts Missing the LifePoint?

The following article is a reprint of my 26 August 2008 RealMoney column.

Since 2001, hospital stocks have been looking green around the gills. Shares of LifePoint (LPNT) , Universal Health Services (UHS) and Community Health (CYH) have pretty much gone nowhere. Tenet Healthcare (THC) and Health Management Associates (HMA) look even worse, having lost more than 50% of their value.

That may be about to change. As I have noted before, employment statistics show hospitals as being one of the few industries reporting significant hiring. Unfortunately, I believe the lean years have left analysts who are covering the stocks too shell-shocked to notice improving fundamentals.

Evidence of the high degree of skepticism can be found in a Forbes article published on Aug. 8, when LifePoint issued a positive earnings report and raised guidance. The article focused on declining admissions and fears that a sinking economy could increase bad-debt expense. JPMorgan analyst Dawn Brock was quoted as saying, “We are concerned about the sustainability of margins given the weak admissions growth, especially as we do not believe the company can continue to see bad debt improvement given the overall macro environment.” Stifel Nicolaus analyst Robert Hawkins said the company had done a poor job of managing its expenses.

Investors weren’t listening to the analysts. LifePoint shares soared 10% on the increased guidance and have held steady since. I believe the company’s strategy may finally get the shares out of their multiyear rut. If I’m right, the analysts covering the name will probably be the last to hear about it.

Better Than Its Price

LifePoint operates hospitals in non-urban communities in 17 states. Of the company’s 48 hospitals, 44 are in communities where LifePoint is the sole community hospital provider. Its strategy is to increase the services available at such hospitals to capture more of the revenue opportunity in these communities. On the recent conference call, LifePoint CEO Bill Carpenter said that “early deep dive hospitals have already through the first six months of the year met or exceeded their full year 2008 targets.”

Even after the 10%, rally the shares certainly don’t seem excessively priced. At less than 13 times the 2009 consensus earnings estimates, many would likely consider them cheap. Given that the company has exceeded earnings estimates in three of the last four quarters, the current consensus estimates could be too low. That would make the shares cheaper still.

The earnings also translate into strong free cash flow, measured as cash from operations less capital expenditures. Over the last 12 months, LifePoint’s free cash flow totaled $127 million, or 6.9% of the company’s market capitalization. With five-year Treasuries yielding barely more than 3%, that represents a pretty healthy risk premium, even before considering growth opportunities due to the company’s strategy.

Analysts expect LifePoint to increase earnings by 10% annually over the next three to five years, a rate that is in line with the company’s sustainable growth rate on the basis of fundamentals. Meanwhile, at 1.2 times book value, it is trading well below the industry average of 2.1 times.

If earnings grow as expected and the price/book multiple expands to the industry average multiple over the next five years, total returns could approach 25% per year.

Maybe by then the analysts will have caught up to the story.

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