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Overview
Tennessee-based, Province Healthcare Company (PRV or the Company) is engaged in the business of owning, leasing, and managing hospitals in non-urban communities throughout the United States. The Company owns or leases 20 general acute care hospitals in 13 states with a total of 2,273 licensed beds. Its general acute care hospitals typically provide a range of services commonly available in other acute care hospitals, such as internal medicine, general surgery, cardiology, oncology, orthopedics, obstetrics, rehabilitation, sub-acute care, and diagnostic and emergency services. Its hospitals also generally provide outpatient and ancillary healthcare services, such as outpatient surgery, laboratory, radiology, respiratory therapy, home healthcare and physical therapy. Some of its general acute care hospitals have a limited number of licensed psychiatric beds. In addition, the Company provides management services to 36 primarily non-urban hospitals that it does not own or lease in 14 states with a total of 2,985 licensed beds. Its website is:
Key Positive Arguments / Key Negative Arguments- Analysts state that newly acquired (LifePoint) and constructed facilities should contribute to earnings in 2005 and 2006
- The Company is undertaking a number of service expansion projects (CT’s, MRI’s, nuclear, ASC’s and other) to meet the increasing demand
- One analyst (Raymond James) believes that the Company’s asset base has the ability to gain a at least 300 bps of operating margin upside as it is integrated into LifePoint’s portfolio
- Physician recruitment efforts are exceeding expectations
- Bad debt expense increases remain a major operating issue according to several analysts
- Reductions in Medicaid coverage could hamper results going forward
- The Company faces risk of the potential impact of any one hospital on its operating results given its 20-hospital portfolio
Out of eleven analysts covering the stock, 78.0% gave a neutral rating, and the remaining 22.0% gave a negative rating. There is currently no positive rating on the stock.
NOTE: The Company’s fiscal year ends on December 31; all fiscal references coincide with the calendar year end.
Recent Events
On April 1, 2005 PRV announced that it has received the requisite consents and tenders from holders of its 7-1/2% Senior Subordinated Notes due 2013 (CUSIP No. 743977AF7) (the "Notes") to eliminate substantially all of the restrictive covenants and to significantly amend the merger covenant and certain events of default and related provisions contained in the indenture governing the Notes.
On March 28, 2005 LifePoint Hospitals, Inc. (Nasdaq: LPNT) and PRV jointly announced that their stockholders have approved LifePoint Hospitals' proposed acquisition of Province Healthcare.
On March 18, 2005PRV stated that, in connection with its previously announced merger with LPNT, it has commenced a cash tender offer and consent solicitation for any and all of its $200 million outstanding principal amount of 7-1/2% Senior Subordinated Notes due 2013 (CUSIP No. 743977AF7) (the "Notes").
On February 16, 2005, PRV announced its 4Q04 results. Diluted EPS from continuing operations for 4Q04 increased to $0.27, compared to $0.23 in the prior year quarter, and for the year increased to $0.96 from $0.84 in the prior year.
Sales
Provided below is a summary of revenue as given by Zacks Digest:
($ in Millions) / 4Q04A / FY04A / 1Q05E / 2Q05E / FY05ENet Sales / $239 / $887 / $243 / $238 / $988
Digest High / $239 / $887 / $253 / $246 / $1,010
Digest low / $239 / $887 / $233 / $231 / $966
Digest Average / $239 / $887 / $243 / $238 / $988
Total net patient revenue increased by 22.6% on pricing growth (revenue per adjusted admission) of 12.0% and volume growth (adjusted admissions) of 9.5%. The newly acquired Las Cruces, New Mexico facility drove total volume growth (5.6% admissions and 9.5% adjusted admissions), as same-store volumes continued to be weak and the new Hardeeville, South Carolina facility opened in December. Same-store net patient revenue increased by a modest 1.8% year-over-year, driven by pricing growth (net revenue per adjusted admission) of 5.7% that benefited from higher-acuity services associated with the physician specialists recruited by the Company in 2003 and 2004. Solid pricing trends were offset by continued inpatient volume weakness, as same-store admissions declined by 8.6% and same-store adjusted admissions declined by 3.7%, driven primarily by a 25.0% decrease in flu-related volumes (similar to that experience by LifePoint in 4Q04).
The Company continues to see stronger growth in outpatient revenue, which is becoming an increasing portion of total revenue at 46.3% of gross revenue versus 44.3% year ago. Same-store outpatient revenue grew 7.6% in the quarter. Management expects revenue growth to be driven going forward through the maturing of the practices of the 2002 and 2003 physician recruits, growth from new practices of 2004 physician recruits, and through revenue-generating projects such as OR, ER, and cardiac cath lab expansions.
Margin
Provided below is a summary of margins as given by Zacks Digest:
Margins / 2003A / 2004A / 2005EGross / 87.6% / 87.1% / 87.0%
Operating / 12.0% / 12.3% / 13.0%
Net / 5.3% / 5.7% / 5.9%
EBITDA (after minority interest) was $41.2m, up 28.8% vs. last year. This produced a 17.3% margin, up 90 bps vs. the year-ago quarter and up 60 bps over the previous quarter. Salaries, wages & benefits were 36.7% of net revenue, down 110 bps vs. the year-ago quarter and down 10 bps sequentially from 3Q04. Purchased Services expense was 10.0%, up 80 bps over the prior year and up 20 bps sequentially from 3Q04. Supplies expense was 13.3% which was up 70 bps year-over-year and up 30 bps sequentially from 3Q04. Other operating expenses were 10.0%, down 180 bps from the prior year and down 110 bps sequentially from 3Q04. The Provision for Doubtful Accounts was 11.1%, up 30 bps year-over-year but down 20 bps vs. the previous quarter. As was noted in the 3Q04 report, the increase in bad debts year over year is primarily due to the acquisition of MemorialMedicalCenter in Las Cruces, NM, whose bad debt level is above the Company’s average rate. Management expects Medicare pricing increases to be approximately 4.0% in 2005 fiscal year and managed care rate increases in the 4-6% range, with the balance of pricing growth being attributable to increases in acuity.
According to one analyst (Oppenheimer), newly acquired/constructed facilities are exceeding expectationsand, coupled with a number of smaller capex projects, should contribute to earnings in 2005 and 2006.The MemorialMedicalCenter in Las Cruces, acquired in June, continues to exceed management's expectations,with adjusted EBITDA margin expanding to 18.6%. The analyst expects contribution expansion to continue and benefit the combined company for at least the next two years. The recently opened (November 29) Coastal Carolinas facility also exceeded expectations.Although this facility had a negative impact on Province's EBITDA, the admissions and ER visits flow were strong. With a fully occupied MOB, the analyst expects this facility to progressively increase its contribution to earnings over the course of 2005 and 2006. Facilities and relationship improvement with physiciansat LakeHavasu should also benefit company's earnings in 2005.
Earnings per Share
Provided below is a summary of EPS as given by Zacks Digest:
4Q04A / FY04A / 1Q05E / 2Q05E / FY05EDigest High / $0.27 / $0.96 / $0.32 / $0.29 / $1.19
Digest Low / $0.27 / $0.96 / $0.26 / $0.25 / $1.04
Digest Average / $0.27 / $0.96 / $0.28 / $0.27 / $1.10
Zacks Consensus / - / - / $0.28 / $0.27 / $1.09
The Company reported 4Q04 EPS from continuing operations of $0.27 versus $0.23 a year ago. Results were $0.01 ahead of consensus. Reported results were positively affected by a 32.0% tax rate offset by 851,000 in transaction costs and a $44.0 million loss on sale. Excluding the two non-recurring costs and utilizing a more normalized tax rate of 37.0%, Province reported EPS of $0.26, in line with expectations. Operating results for the quarter exclude discontinued operations, which had $0.02 per share in residual expenses for BRIM Healthcare, the hospital management subsidiary.
One analyst (Raymond James) estimates 2005 EPS at $1.13, on the basis that the Company should contribute some $1.0 billion in annualized net revenue to LifePoint’s top-line base.
Target Price/Valuation
Price targets are mainly 12-month price targets, and the Zacks Digest Average is currently $20.33 (16.3% downside). The price target ranges from $16.00 (Jefferies) to $23.00 (Banc of America). The highest price is based on a DCF methodology. The lowest price represents 34.1% downside, while the highest price represents 5.3% downside from the current price. Most analysts (Avondale, Advest, Fulcrum, Jefferies, Oppenheimer, Raymond James) have not given their target prices. None of the analysts have given a positive rating to the stock. The median price target is $22.00.
Broker / Target Price / MultipleBanc of America / $23.00 / -
Jefferies / $16.00 / -
Average / $20.33 / -
Metrics detailing current Management Effectiveness are as follows:
Metric (ttm) / ValueReturn on Assets (ROA) / 4.5%
Return on Equity (ROE) / 10.4%
Return on Invested Capital (ROIC) / 4.9%
ROA, ROE and ROIC all lag averages for the market overall (measured by the S&P 500) of 7.6%, 20.0% and 11.5%, respectively.
Long-Term Growth
Of the nine analysts covering the Company, five have published a 3-5 year EPS growth rate. The average long-term growth rate is 13.63%. The low-end projection is 11.0% (Leerink, Raymond James). The high-end projection of 15.0% (Fulcrum, Avondale, Advest) is the most common long-term growth projection
The Company’s management team confirmed that the LifePoint acquisition remains on track and is to be completed by 1Q05. Also, the Company’s 60-bed ValleyViewMedicalCenter in Fort Mojave, Arizona is expected to open by 3Q05. In terms of other capital projects, the Company is actively working to expand service offerings in some markets, such as introducing a new cardiac program in Lake Havasu, Arizona by early 2005, and developing outpatient surgery centers in a couple of markets. Looking ahead, management noted that the pricing environment should remain fairly healthy, with projected Medicare increases about 4.0%, and managed care rate increases around 4.0% to 6.0%.
Capital Structure and Cash Flow
At the end of December, the Company’s cash balance stood at $9.8 million, down from $46.1 million in 4Q03 and $11.6 million in 3Q04. Cash flow from operations was $33.2 million during the quarter, up significantly from $15.6 million a year ago. For the full year of 2004, cash flow from operations was an impressive $126.3 million, above the $100-$110 million target. The Company ended the quarter with long-term debt of $428 million and short-term debt of $76.2 million, representing a total debt to capitalization ratio of 49.5%.
Debt as a percentage of total capital stood at 49.5% as of 12/31/04. This is a moderate to high level of indebtedness in absolute terms as well as compared to other hospital stocks; a level below 40.0%-50.0% is generally seen as favorable while a ratio of 60.0% or greater should be cause for concern. Low levels of debt would allow PRV flexibility in the decisions to make acquisitions, payoff debt, reinvest in existing hospitals,etc.
Individual Analyst Opinions
POSITIVE RATING – There is currently no positive rating on the stock.
NEUTRAL RATING
Advest – February 17, 2005: Stock is rated Neutral with no price target. The principal risks to the stock price are weak volumes and growing bad debts in the hospital industry, overall government regulation and reimbursement, a dependence on acquisitions to fuel future growth, and the potential impact of any one hospital on Province's operating results given its 20-hospital portfolio.
Banc of America-February 16, 2005: Stock is rated Neutral with $23 price target. The price target is based on risk-adjusted relative forward P/E multiples, supported by discounted cash flow models.
Fulcrum – February 17, 2005: Stock is rated neutral with no price target. The analysts opine that earnings have been adversely affected and share prices have declined. They are reiterating their neutral rating.
Leerink Swann – February 17, 2005: Stock is rated Market Perform with no price target. The analyst remains concerned about the soft admission growth, particularly in light of the solid physician recruitment in 2004. He believes that the pending acquisition of Province by LifePoint Hospitals is a positive for the Company. The analyst maintains his Market Perform rating.
Oppenheimer – March 16, 2005: Stock is rated Neutral with $47 price target. The analyst opines that, 4Q04 results indicate Province is well positioned for the next two years to contribute to the new LifePoint as a result of the increasing contribution to earnings from the Las Cruces and Coastal Carolinas facilities, improved staffing ratios, and the maturing of physicians practices (more than 60% specialists) over the next 18 months. His Neutral recommendation is based on valuation as Province's stock is within 10% of the takeout value.
Jefferies – February 18, 2005: Stock is rated Hold with $16 price target. The analyst opines that the target price represents the fair value of Province shares, prior to the LifePoint offer. The analyst maintained their Hold rating, given the current stock price, which reflects its agreement to be acquired by LifePoint Hospitals for $1.6 billion in cash, stock, and debt.
Raymond James–February 18, 2005: Stock is rated Market Perform with no price target. The analyst believes that PRV shares trade in-line with Lifepoint’s stock performance going forward, given its upcoming acquisition. The analyst maintains their Market Perform rating.
NEGATIVE RATINGS
J.P. Morgan– February 17, 2005: Stock is rated Underweight with no price target. The shares are currently trading at an EV/EBITDA multiple of 9.3x 2005 EBITDA estimate. The analyst maintains their Underweight rating.
Lehman – Stock is rated Underweight with $22 price target. The target price represents 20.0x CY 2005 EPS estimate of $1.10. The analyst reiterates his Underweight rating.
NOT RATED
Avondale – Stock is not rated. No price target.
CIBC – March 11, 2005: Stock is not rated. No price target has been given.