Life Point Hospitals, Inc. (LPNT)
Matt Titus
November 2003
Recommendation
I recommend an overweight position in LPNT. The key reasons for this recommendation are:
A) Strong growth outlook B) Valuations are compelling C) Long-term demographics are positive D) Short term
economics are improving
StockVal®
LIFEPOINT HOSPITALS INCORPORATED (LPNT) Price 29.3
1999
2000
2001
2002
2003
2004
51
43
36
HI
LO
ME
CU
GR
30
25
21
50
10
31
29
25.3%
17
14
12
11-12-1999
11-19-2003
10
PRICE
1.68
1.56
1.44
HI
LO
ME
CU
1.32
1.20
1.12
1.65
0.81
1.21
1.13
1.04
0.96
0.88
11-12-1999
11-19-2003
0.80
PRICE RELATIVE TO HOSPITALS (059A) E-Wtd
LPNT has outperformed the group (HCA, HMA, LPNT, PRV, THC, TRI, UHS, VTR) since going public.
However, as seen below, they have performed inline with the group over the past two years. I believe that they will
be able to outperform the group over the next several years.
LIFEPOINT HOSPITALS INCORPORATED (LPNT) Price 29.3
2002
StockVal®
2003
42
38
35
HI
LO
ME
CU
GR
32
30
27
41
20
30
29
1.9%
25
23
21
11-09-2001
11-19-2003
19
PRICE
1.20
1.16
1.12
1.08
HI
LO
ME
CU
1.04
1.00
1.17
0.88
1.01
1.00
0.96
0.92
0.88
11-09-2001
11-19-2003
0.84
PRICE RELATIVE TO HOSPITALS (059A) E-Wtd
This document is intended for academic review only and should not be relied upon as investment advice.
LPNT outperformed the S&P 500 in 1999 and 2000, then was a good defensive name in 2001 and 2002, but has
under performed by seventeen percent so far in 2003.
StockVal®
LIFEPOINT HOSPITALS INCORPORATED (LPNT) Price 29.3
1999
2000
2001
2002
2003
2004
52
40
32
HI
LO
ME
CU
GR
26
20
16
50•
8
30
29
28.3%
12
10
8
05-07-1999
11-19-2003
6
PRICE
5.8
4.6
3.6
HI
LO
ME
CU
2.8
2.2
1.6
5.61 •
0.77
3.55
3.73
1.2
1.0
0.8
05-07-1999
11-19-2003
0.6
PRICE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
I anticipate that the group will remain mainly a defensive sector over the next several years; however, owing to
several positive fundamental and demographic elements, I think that the hospital group will make a solid holding.
LPNT will be especially good since I believe that their higher-than-group average growth rate will help them
outperform the defensive nature of the group in up years and their conservative balance sheet will allow them to
remain a good defensive player in down years.
Growth Catalysts
LPNT will be able to grow earnings in three ways over the next several years. First, as the economic
condition if the United States improves, utilization of health care will also improve. Coupled with positive
demographic changes in the U.S. population, utilization will increase even in the face of increasing cost shifting to
the consumers in the form of higher co-pays and deductibles. I will cover this in more detail in the economic
section of this piece.
LPNT, as a rural hospital also stands to gain significantly if the proposed changes in the Medicare
Drug Benefit Bill are passed, which has passed the House but has not been voted on in the Senate. Whether a
hospital chain is predominantly urban or rural is relevant for several reasons. Currently rural Medicare
reimbursements are lower than urban. The Medicare bill may include: increases to rural providers due to a reversal
of the cost differential status between rural and urban providers, an increase to rural hospital that treat a
disproportionate share of low income individuals, lowering the labor cost portion of the reimbursement which is
currently a positive for urban facilities, including a new low-volume adjustment if a facility is the only one in a
fifteen mile radius and has low volumes, and including a full market basket increase through 2007.
LPNT management has stated that they are ready to start growing through acquisition again. LPNT only
needs to make one or two $50 million dollar acquisitions in the next 12 months to grow their top line around 10%.
LPNT management has commented that this is what they plan to do. If they can grow the top line around 10% just
through acquisitions and experience improved demographics LPNT will be able to produce earnings growth ahead
of expectations.
2
Price Target
I used a dividend discount model and valuation metrics to determine a target price for LPNT. In my model,
I used an ROE of 17%. This is lower than the current ROE of 20%, which is an all-time high for LPNT. I wanted
to use a more conservative ROE since when LPNT starts acquiring again; new facilities will initially bring down
LPNT’s ROE. I used the consensus growth rate of 15%. Any growth above this, which I believe is possible, will
lead to an even higher target price.
ROE
Growth
Book Value
Payout Rate
Risk Free
17%
15%
1
35%
5%
Multiple
4.32
BV
8.91
TGT
38.47
The DDM produced a target price of $38.47. This gives a 31% upside to the closing price on 11/20/2003. I will
cover valuation metrics in more detail later on, but if LPNT returns to their mean Price to Book valuation of 4.5
their target price would be $40. If LPNT returns to their mean forward price to earnings valuation, that would give
a target price of around $44.50. There is significant upside in the stock even if you take the conservative target of
$40.
Company Overview
Source: S&P Corporate Records
LifePoint Hospitals, Inc. (LPNT) operates 21 general, acute care hospitals located in non-urban areas with an
average population of approximately 27,000 (based on 1999 data) in Alabama, Florida,
Kansas, Kentucky, Tennessee, Utah and Wyoming. In 20 of the company's 21 markets, LPNT's hospital is the only
hospital in the community.
Approximately half of LifePoint's facilities are located in Kentucky and Tennessee. Many of the company's
hospitals are located in states that have certificate of need laws, which laws may have the effect of limiting the
development of competing facilities.
LPNT's hospitals usually provide the range of medical and surgical services commonly available in hospitals in
non-urban markets. These hospitals also provide diagnostic and emergency services, as well as outpatient and
ancillary services such as outpatient surgery, laboratory, radiology, respiratory therapy and physical therapy.
During 2000, LPNT sold Springhill Medical Center, Barrow Medical Center, Trinity Hospital and Halstead
Hospital to community-focused buyers. In addition, it sold Riverview Medical Center to one of the largest acute
care hospitals in Baton Rouge, Louisiana. These sales allowed the company to pay down existing borrowings under
its credit facility, reinvest in existing markets and provide funds for future acquisitions.
EMPLOYEES- January 31, 2001, 4,890 Full Time; 1,560 Part Time.
3
Sustained Competitive Advantage
When thinking about the sustained competitive advantage of LPNT, you need to consider it on an urban
versus rural basis and a for-profit versus a not-for-profit basis. An advantage LPNT has, as a rural company, is less
competition from specialty hospitals. Specialty hospitals focus on specific, generally higher profit types of
procedures, such as orthopedic or cardiology procedures. The concern is they are taking dollars from hospitals that
provide emergency and charitable services. Some (≈70%) of them are physician owned, causing a potential
conflict of interest as well. According to the GAO, there are around 100 of them in 28 states, but around two-thirds
of them are in Arizona, California (11), Kansas (8), Louisiana, Oklahoma (9), South Dakota (7), and Texas (20).
Around sixty percent of the specialty hospitals under development are located in California, Louisiana, and Texas.
These hospitals tend (≈83%) to locate in states without CON laws, and approximately eight-five percent are in
urban areas. Although in 2001, specialty hospitals only accounted for 1% of Medicare’s inpatient expenditures,
two-thirds of which was in cardiac hospitals, they are growing rapidly. Specialty hospital’s Medicare inpatient
margin is two hundred and twenty basis points lower than for-profit general hospitals, but is still one hundred and
seventy basis points lower when considering all payor types. Twenty-five specialty hospitals are expected to open
within the next year. I believe that specialty hospitals will continue to be a source of competition for urban facilities
unless government action, as proposed in the current Medicare Drug Benefit Bill. Even if a form of relief is passed,
any existing facilities will be grandfathered in.
The other competitive advantage that LPNT and all public hospitals have is the ability to take share from
the not-for-profits. By having access to the equity markets, LPNT is able to bring extensive capital resources to
bear when purchasing and then upgrading a facility. Not only does this allow them to increase earnings from
operating efficiencies, they are also able to bring new product offerings, such as cardiac specialists and advanced
imaging to that market. This allows them to take share from other hospitals that do not have these resources.
Economic Analysis
The state of the economy affects hospitals on several fronts. In a weak economy, unemployment will be
higher which will reduce the number of corporate insured and increase uninsured and government insured. A weak
economy may also reduce utilization trends for elective care. Below are some recent highlights from the U.S.
census bureau:
Insurance Coverage: The U.S. Census Bureau recently stated for 2002:
• The number of uninsured increased by 2.4m in 2002 as compared to 2001, which is 15.2% of the total
population compared to 14.6%. Unemployment has increased 30bp from 5.8 to 6.1%.
• The percentage of people with employment-based health insurance dropped from 62.6% to 61.3% in 2002.
• The percentage of people covered by the government rose from 25.3% to 25.7% mainly due to an increase
in Medicaid coverage (from 11.2% to 11.6) For the population between 18 and 64 years old, 82% of
workers had insurance and 74.3% of non-workers had insurance.
• 99.2% of those 65 and over have coverage due to Medicare
• 74.7% of people without health coverage were covered again within a year.
4
Also from the U.S. Census Bureau for 48 month study between 1996-1999:
• During the study, Hispanics were the most likely to go without coverage for at least one month (40.6%) as
compared to Whites (14.6%) and Blacks (28.8%).
• Suburban individuals (72.6%) were the most likely to have continuous coverage as compared to rural
(64.7%), and city (62.2%).
• The median spell without coverage was 5.6 months.
A continuing weak employment situation will still be a headwind for organic growth in the space in the short term.
There is a lag between improvements in the labor market and improvements in hospital utilization. On a secular
basis, there will definitely be an increase in demand as baby boomers began to utilize more care. The following
graph shows cross sections of the U.S. population as of July 1. 2000.
According to the U.S census bureau, the over-65 age group has been growing at slightly less than 1% per
year. They estimate that this will increase to a growth rate of around 2% by 2007. This suggests that the
latter part of the decade should bring strong growth in admissions.
Although I do think that LPNT will make a good long term holding based on the demographics, hospitals in general
are still a defensive group and may under perform other areas of the market, such as technology and cyclicals.
However knowing this, may lend the ability to opportunely buy LPNT on any weakness in the group due to asset
rotation.
5
Facility Capacity
Inpatient Days per Bed
6000
80.0%
5500
70.0%
5000
60.0%
4500
50.0%
1975198119851989199319972001
Number of Hospitals
Capacity Utilization
days
Total Hospital Capacity
285.0
4.0%
275.0
2.0%
265.0
0.0%
255.0
-2.0%
245.0
-4.0%
235.0
-6.0%
225.0
215.0
-8.0%
1975198119851989199319972001
Inpatient days per bed
Percent Change
Source: American Hospital Association
We have seen a long decline in the number of hospitals and a bottoming out and turnaround in capacity utilization.
I do not think that we will see an increase in the number of hospitals because today’s environment still provides a
large number of not-for-profit facilities that would be cheaper to buy rather than build. However, on the outpatient
side I would expect to see strong growth in non-CON states unless there is action by congress. A CON state is a
state where a Certificate of Need must be filed in order to add new facilities.
Government Budgeting
Government reimbursement rates can have a dramatic affect on this group. The group was more than cut in half
following the BBA on ’98 and the cuts to Medicare. I do not anticipate this happening, but if the deficit continues
to worsen this is not a group that you would want to hold when the red ink comes out. However, all else being
equal, this may be a good group to get into after any balanced budget initiative on the premise that Medicare
funding would return to a normal rate of increase. One issue that may arise in a few years is a cut in
reimbursement rates if the drug benefit bill costs too much.
6
Key Markets
I have included state population statistics. One risk to LPNT is that it derives a lot of revenue from Tennessee and
Kentucky. And although Tennessee is growing, this leaves them open to risks due to economic changes in these
states.
Percentage Population Change, 1990-2000
Source: U.S. Census Bureau
This graph shows population percentage changes through the nineties. Growth was good in the South and
West, and was best in the Mountain States. The national average was 13.1%, but the median was just under
10%. Growth rates can very dramatically by county in a state as well. Unemployment is obviously another key
factor and I have included state unemployment statistics in the following table. If one wants to play the group
as a defensive idea, then one may want to look for companies that have lower unemployment in their markets.
Or if one wants to play a cyclical rebound, then look for states that have higher unemployment in fast growing
states.
7
Census Population Percent
65
Median % Below Unemployment
April 1, 2000
Change & Older Income Poverty
33,871,648 13.8
10.6
47.5
14.2
6.4
20,851,820 22.8
9.9
39.9
15.4
6.5
18,976,457
5.5
12.9
43.3
14.6
6.4
15,982,378 23.5
38.8
12.5
5.2
17.6
12,419,293
8.6
12.1
46.5
7.1
10.7
12,281,054
3.4
15.6
40.1
11
5.3
11,353,140
4.7
13.3
40.9
10.6
5.8
5,740,021 16.7
12.4
36.3
13.5
5.5
4,041,769
9.7
12.5
33.6
15.8
5.5
8,186,453 26.4
9.6
42.4
13
4.4
5,130,632 40.0
13
40.5
13.9
5.6
4,301,261 30.6
9.7
47.2
5.6
9.3
2,233,169 29.6
8.5
45.7
5.1
9.4
1,998,257 66.3
11
44.5
5.2
10.5
281,421,906 13.2
12.4
41.9
12.4
6
* U.S. DOL Sept. 2003
Source: U.S. Census Bureau, Census 2000 Redistricting Data (P.L. 94-171) Summary File and 1990 Census.
Area
California
Texas
New York
Florida
Illinois
Pennsylvania
Ohio
Tennessee
Kentucky
Georgia
Arizona
Colorado
Utah
Nevada
United States
This chart highlights the largest states, the fastest growing states, and LPNT’s key states of Kentucky and
Tennessee. Some critique LPNT for Kentucky and Tennessee’s income and poverty levels, but unemployment is
low in both states and Tennessee is growing faster than the national average.
Utilization Trends
Average Same Store Admissions
CYH, HCA, HMA, LPNT, TRI
7.0%
6.0%
6.0%
5.2%
5.0%
4.1%
3.7%
4.0%
3.5%
2.6%
3.0%
1.9%
2.0%
0.9%
1.0%
0.7%
1.1%
6/03
9/03
0.0%
-1.0%
-0.8%
-2.0%
3/01
6/01
9/01
12/01
3/02
6/02
9/02
12/02
3/03
Source: Company reports.
Source: Bear Stearns
Many investors focus on the short-term quarterly changes in admission rates but do not focus on the longterm trends. The next chart shows the secular trend in admissions. Understanding that positive long-term
trends are in place, one may want to purchase LPNT on any group weakness due to short-term
fluctuations.
8
Admissions (in thousands)
37,000
36,000
35,000
34,000
33,000
32,000
31,000
30,000
29,000
28,000
27,000
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
Source: Bear Stearns
The next graph shows outpatient utilization. Although growing at a decreasing rate, due to the advent of managed
care products, outpatient admissions are still growing. Due to growth in the U.S. population and demographic
shifts, I think that outpatient utilization is likely to increase form present levels.
in millions
Outpatient Visits
600
500
400
300
200
100
0
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
1975
1981
1985
1989
Total Outpatient Visits
1993
1997
2001
Growth in Outpatient Visits
Source: American Hospital Association
millions per year
Inpatient v. Outpatient
610.0
510.0
410.0
310.0
210.0
110.0
10.0
1975
1981
1985
1989
Inpatient Admissions
1993
1997
Outpatient Visits
Source: American Hospital Association
9
2001
The group will start running into easier comps in 1Q’04. Coupled with improvement in the employment situation,
this could provide for upside in earnings and multiples. To the extent that costs in the form of increased co-pays
and deductibles continue to shift costs to individuals, this will be a negative drag on utilization. The final round
of the Hewitt data suggests that co-pays will be up again in 2004. I have attached a summary following this
report.
Pricing Trends
Pricing Expectations by Payor Category for the next 2-3 years.
Medicare:
2-3% (for 2004, full market basket less program structural changes)
Medicaid:
0% (varies by state)
Managed Care:
5-8%
Self Pay and Other:
0%
Source: Bear Stearns
October Hospital PPI for all payors came it at 5.8%, which is down from recent highs but still nearly twice the
average rate. Hospital CPI, which is for self-pay and managed care, came in slightly higher at 6.0% for inpatient
and 6.8% for outpatient, but continues to decelerate.
Medicare pricing serves as a floor for all of hospital pricing. Since so many hospitals are not-for-profit and so
many are losing money, it is politically difficult for Medicare rates to be held too much lower than a 2-3%
increase every year. Managed care rates are also very important. The managed care companies are in a more
mature industry and the large national players have a fair degree of pricing power. Another advantage of the rural
hospitals is that many of their facilities are the sole facility in the community. This helps even out the pricing
power between the hospital company and the managed care company.
Malpractice Insurance
As of March 2003, medical liability expenses have doubled for nearly half of the hospitals in crisis states costing
as much as $11,435 per staffed bed in crisis states compared with $4,228 per staffed bed in reform states. Crisis
states as identified by the American Medical Association as of March 2003 are: Pennsylvania, West Virginia,
Nevada, Mississippi, Washington, Oregon, Texas, Arkansas, Missouri, Georgia, Florida, Illinois, North Carolina,
Kentucky, Ohio, New York, Connecticut and New Jersey. Over the past two years rates have increased 158% in
crisis states, 104% in other non-reform states, and 74% in reform states. Reform states are CA, CO, IN, and WI.
Acquisitions
The group tends to pay somewhere around .8x-1.2x annual revenues for a facility. They see large not-for-profits
as net sellers at this time. Generally, all of the companies look at each facility that is available, which average
around $40-$60m on the rural side.
Other
Cap X/ LTM Rev.
Community Health
HCA
Health Management
LifePoint
Triad Hospitals
Average
12/01
4.9%
7.6%
4.0%
5.8%
7.5%
6.0%
3/02
4.5%
8.0%
3.7%
5.6%
7.9%
6.0%
6/02
4.9%
8.6%
4.1%
5.9%
8.3%
6.4%
9/02
4.8%
8.6%
5.1%
7.0%
9.0%
6.9%
12/02
4.7%
8.7%
5.4%
8.2%
8.4%
7.1%
3/03
5.1%
9.0%
5.9%
8.7%
7.7%
7.3%
6/03
4.9%
8.7%
6.3%
8.7%
7.2%
7.2%
PRV, UHS, and THC spent 6.6%, 5.7%, and 6.3% of revenue on cap-x on a LTM basis.
10
Recent studies by BCBS and the GAO have shown that increased technology, such as adding cardiac services,
increases utilization and spending. At the same time, increased technology can increase efficiencies and reduce
cost by shortening length of stay. Spending on new technology and procedures will bring more patients into
public facilities in comparison to others.
Doctor Retention: One main risk of the smaller companies is their ability to attract and retain doctors. If you
only own a relatively small number of hospitals, retention problems at one facility can have a noticeable impact to
the top line. It will affect recruiting costs, as those doctors need to be replaced. It will also affect revenues,
revenue mix, and bad debt as the old doctor takes the “good” patients who have insurance and the new doctor
initially has a larger percentage of Medicaid and self-pay patients. Some of the small companies have traded
down quite hard on these problems and have subsequently rebounded. If we see a blow-up of this type, it may
provide a good entrance opportunity all things else held equal.
Industry Analysis
The hospital industry is still in the early stages of its life cycle. The public companies only own 11% of
the hospitals in the country. I have included a market share breakdown below.
# of
Hospitals
185
114
47
49
72
25
28
20
Market
Share
3.8%
2.3%
1.0%
1.0%
1.5%
0.5%
0.6%
0.4%
Total Public Hospitals
Total Non-Public Hospitals
540
4,368
11.0%
89.0%
Total Urban Hospitals
Total Rural Hospitals
2,741
2,167
55.8%
44.2%
Company
HCA
Tenet Healthcare Corp.
Health Management Associates
Triad Hospitals, Inc.
Community Health Systems
Universal Health Services
Lifepoint Hospitals, Inc.
Province Healthcare Company
Total Community Hospitals
4,908
100.0%
Source: Company reports; "Hospital Statistics", American Hospital Association.
Source: Bear Stearns
Bear Stearns also estimates that roughly one third of not-for profit-hospitals are losing money as well.
This leaves ample opportunities for LPNT to make acquisitions at a reasonable price. It will also help industry
wide utilization rates and the total number of hospitals continues to decline.
Another interesting point about the industry is that since it is so young, many of the players do not
directly compete against each other. LPNT, for instance is the sole hospital in 20 out of 21 of their markets. I
think that the management teams of these companies realize that it is far easier to grow their business by acquiring
not-for-profits and taking share from not-for-profits rather than competing head to head against another public
facility.
11
Company Management
LPNT is unfortunately on their third CEO in the last few years due to untimely deaths of the previous two. This
leaves an experience lag at the top of the company and might help explain the depressed P/E ratio. I have met the
CEO and CFO and they come across a little less sophisticated than some of the other hospital management teams.
However, when I met with them, after debt write-offs by TRI and THC in the third quarter, they seemed to have a
good handle on their own bad debt expenses. They do not use retroactive experience based reserving, but make
estimates as they see changes in their book of business. They cited the specific example of an increase in selfpayors in the third quarter. LPNT immediately wrote-off the above trend revenue from this payor source. This
helps me to be less concerned about the receivables on the balance sheet at LPNT.
Earnings: More than consensus growth?
LPNT earnings have been revised down this year due to weak economic conditions and the recent restructuring.
Although the stock has moved up this year, I do not believe that current consensus includes an economic
rebound, the benefits of the Medicare drug bill, and future acquisitions. I would expect 2004 estimates to be
revised up by within the next quarter or two.
First Call FY1 & FY2 Revision Trend
StockVal®
LIFEPOINT HOSPITALS INCORPORATED (LPNT)
0%
1.73
1.73
FY1 DEC 2003
CURRENT EST 1.62 DOWN 6.36% FROM NOV 2002
1.73
1.72
1.72
1.72
-3%
-6%
1.62
1.59
-9%
1.58
1.59
1.57
1.58
1.59
-12%
0%
11/02
12/02
2.11
2.11
1/03
2/03
3/03
4/03
5/03
6/03
7/03
8/03
9/03
10/03
LAST
FY2 DEC 2004
CURRENT EST 1.84 DOWN 12.80% FROM NOV 2002
2.07
-4%
2.06
2.05
2.05
-8%
-12%
1.86
1.84
1.83
1.83
1.83
1.83
1.84
6/03
7/03
8/03
9/03
10/03
LAST
-16%
11/02
12/02
1/03
2/03
3/03
4/03
5/03
Risks/Concerns
Some of the main risks of investing in LPNT include:
1) Management turnover
2) Reliant on Medicare
12
3)
4)
5)
6)
7)
8)
Derives a large portion of revenue form two states
Open to malpractice litigation
Must maintain good physician relationships
Must be able to efficiently acquire new facilities
Continued cost shifting to individuals
Economic and employment weakness
Financials
This first topic I would like to cover on the financial statements is the hot topic of late: bad debt expense.
Revenue Mix/Bad Debt
Revenue Mix & Current Bad Debt
HCA THC
Medicare
28.0
Medicaid
6.0
Managed Care
42.0
Self Pay & Other
24.0
Bad Debt % of Rev.
8.9
8.5
HMA
38.0
9.0
45.0
9.0
TRI
32.0
5.2
39.3
23.5
CYH
31.7
12.2
18.8
37.3
UHS
42
PRV
38
11.4
39
19
LPNT
34.8
15.9
38.6
10.7
7.3
8.6
9.4
7.3
8.6
8.9
50.6
AVG
30.5
17.0
52.5
8.6*
* 50bp higher than last Q
There are a few factors that contribute to bad debt and the subsequent “surprises”. First, on the front end, the mix
of business adds a great deal. Self-pay and self-insured will have a much higher level of uncollectibles, but they
are also billed at the top-rate. As co-pays and deductibles continue to increase, uncollectible amounts for insured
will also rise. Revenue mix can also affect the multiple. Some analysts frown on Medicare and Medicaid
business because of its lower margins and political overhangs. However, looking at LPNT for an example, if they
also have lower level self-pay and self-insured, they should not be penalized. LPNT is able to get a lower level of
self-pay because in some of their states they can register an eligible individual for Medicaid after the individual
receives treatment. This allows them to move that revenue for self-pay to government and collect on it. The front
end is also affected by the rate of price increases. If a company is more aggressive on pricing, they will most
likely need to increase their reserves or eventually take a “surprise”.
On the back end, there are two methodologies used to reserve for bad debt. Five of the companies, including
LPNT, use experience-based reserving, meaning they estimate bad debt by each specific payor allowing for a
more flexible approach but is subject to management “tweaking”. HMA, PRV, and UHS use actual trailing bad
debt. HMA and PRV write off everything after 150 days and UHS ranges from 120 to 180 days. This method
takes out management discretion, but the lag may lead to under reserving in rising revenue periods.
In the recent past HCA, TRI and THC have been raising prices the most and LPNT, PRV, and HMA have been
more conservative. I have attached a report covering this topic.
13
Receivables and Turn
Receivables as a Percentage of Revenue
12 Mos.
09-03
2002 2001
HCA
13.8% 14.1% 14.0%
THC
23.1% 19.2%
HMA
20.6% 20.1% 20.2%
TRI
14.3% 14.3% 16.7%
CYH
18.8% 18.2% 21.9%
UHS
13.7% 14.6% 14.7%
LPNT
11.7% 11.4% 9.2%
PRV
14.9% 16.7% 20.7%
AVG (EWTD)
2000
14.4%
21.1%
23.6%
13.8%
23.2%
16.8%
7.5%
19.0%
1999
12.3%
23.9%
25.0%
11.3%
21.0%
15.1%
9.1%
25.6%
1998
12.0%
23.9%
21.4%
14.9%
19.7%
13.7%
7.3%
21.5%
1997
16.2%
21.3%
14.8%
12.5%
18.1%
0.15
0.16
0.17
0.17
0.18
0.17
0.17
48.5
50.0
68.5
73.1
42.2
73.3
51.1
29.0
68.4
48.8
79.9
82.3
47.5
73.2
55.7
29.0
69.2
47.1
85.2
78.4
53.2
66.8
50.4
29.4
73.8
51.8
78.8
60.3
58.9
69.4
50.4
42.5
32.8
62.8
41.2
57.5
57.0
60.7
60.5
54.8
55.5
Receivable Turn
HCA
THC
HMA
TRI
CYH
UHS
LPNT
PRV
70.0
49.2
61.4
49.4
36.3
56.9
49.0
81.3
67.3
49.2
63.9
50.0
34.8
58.9
AVG (EWTD)
53.1
56.8
In an environment where costs are shifting to the individual and bad debts are rising, it would make sense to be
cognizant of the potential downside due to receivable write-offs. We have seen a few of these already, and they
may continue. LPNT has the lowest level of receivables as a percentage of assets. LPNT also stands out as the
lowest on receivable turn as well. As stated above, a company’s level of receivables and potential for increasing
bad debt expense and/or increasing allowances, is a function not only of the overall economic environment, but of
the mix of self-pay and self-insured individuals as well.
14
Income Statement
Company Explorer - Income Statement - Latest Twelve Months
24-Nov-03
COMPUSTA
T
LIFEPOINT HOSPITALS INC
LPNT
53219L10
Summary - Millions
NET SALES
Sales Growth
Cost of Goods Sold*
Gross Margin
EBITDA
EBITDA Growth
EBITDA Margin
EBIT
EBIT Margin
Interest Expense
PRETAX INCOME
NET INCOME before Extraordinary
Items
Net Income Growth
Net Margin
EPS Diluted, before Extraordinary
Items
EPS Growth
EPS Diluted, from Operations
Operating EPS Growth
9/03
871.7
23.5
662.7
24.0
170.1
15.5
19.5
126.8
14.5
13.3
113.5
6/03
826.6
22.8
630.2
23.8
166.9
22.5
20.2
125.5
15.2
13.0
108.3
3/03
782.9
21.1
592.0
24.4
162.3
25.1
20.7
122.6
15.7
12.5
80.9
12/02
743.6
20.1
558.6
24.9
158.0
30.6
21.2
120.1
16.2
13.3
76.3
9/02
706.0
18.1
550.4
22.0
147.3
28.0
20.9
109.4
15.5
13.8
65.1
6/02
673.0
13.4
542.4
19.4
136.3
20.8
20.3
99.1
14.7
14.8
58.0
3/02
646.7
12.4
537.3
16.9
129.7
21.6
20.1
93.7
14.5
15.7
76.7
12/01
619.4
11.2
533.1
13.9
121.0
22.6
19.5
86.3
13.9
18.1
68.7
67.0
95.9
7.7
63.5
119.0
7.7
45.7
14.2
5.8
41.7
19.5
5.6
34.2
14.0
4.8
29.0
6.2
4.3
40.0
77.8
6.2
34.9
95.0
5.6
1.72
93.3
1.54
9.7
1.63
114.5
1.53
28.2
1.16
10.5
1.48
39.9
1.07
13.8
1.40
56.5
0.89
7.2
1.40
83.3
0.76
-1.3
1.19
73.5
1.05
59.1
1.05
67.9
0.94
74.1
0.89
74.2
Net Income Adjusted **
EPS Adjusted **
67.0
1.54
67.7
1.56
74.9
1.71
72.2
1.64
64.7
1.68
55.3
1.43
41.3
1.07
34.4
0.90
Total Shares Outstanding
Diluted Shares
38.4
43.4
38.7
43.3
39.6
43.9
39.6
44.0
39.5
38.6
39.5
38.7
39.4
38.5
39.3
38.4
* Depreciation and Amortization Expense is included in Cost of Goods Sold
** Net Income before Extraordinary Items adjusted for Nonrecurring Pretax Expense (Income)
What should be noted about the income statement is the strong growth in revenues coupled with
consistent EBITDA margins, which has led to very good earnings growth.
15
Balance Sheet
Balance Sheet
StockVal ®
LIFEPOINT HOSPITALS INCORPORATED (LPNT)
FYE Dec
2002
% Chg
2001
% Chg
2000
% Chg
1999
% Chg
1998
Cash & Equivalents ($ Mil)
23.0
-60
57.2
44
39.7
218
12.5
Accounts Receivable
85.0
50
56.7
13
50.0
7
46.7
28
36.4
Inventories
20.5
26
16.3
17
13.9
-3
14.3
2
14.0
Other Current Assets
14.8
-21
18.7
-16
22.2
-14
25.9
39
18.6
0.0
Total Current Assets
143.3
-4
148.9
18
125.8
27
99.4
44
69.0
Plant & Equipment Gross
610.2
12
543.3
9
499.9
1
492.8
11
442.6
Accumulated Depreciation
238.0
16
204.9
12
183.4
-8
198.4
13
176.2
Plant & Equipment Net
372.2
10
338.4
7
316.5
8
294.4
11
266.4
Other Long-Term Assets
218.0
225
67.0
24
54.0
103
26.6
36
19.6
590.2
46
405.4
9
370.5
15
321.0
12
286.0
733.5
32
554.3
12
496.3
18
420.4
18
355.0
28.5
50
19.0
18
71
15.5
4
26.6
42.1
Total Long-Term Assets
Total Assets
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Deferred Income Taxes
0.0
46.9
0.0
-1
47.2
42
16.1
-39
26.5
11.1
258
3.1
33.2
20
27.6
0.0
75.4
14
66.2
10
60.4
6
57.2
36
250.0
67
150.0
-46
278.3
8
257.1
9999
0.3
24.9
19
21.0
38
15.2
22
12.5
-41
21.3
25.6
51
16.9
80
9.4
176
3.4
-98
167.7
Total Long-Term Liabilities
300.5
60
187.9
-38
302.9
11
273.0
44
189.3
Total Liabilities
375.9
48
254.1
-30
363.3
10
330.2
43
231.4
5.2
13
4.6
2
4.5
-8
4.9
Other Long-Term Liabilities
Minority Interest
Preferred Equity
Common Equity
357.6
21
295.0
130
128.4
50
85.7
-28
118.7
Total Equity
357.6
21
295.0
130
128.4
50
85.7
-28
118.7
733.5
32
554.3
12
496.3
18
420.4
18
355.0
Total Liab & Equity
There are a few things that need to be noted on the annual balance sheet. First, accounts receivable increased by
50% year over year; however, as noted above, I am comfortable with their treatment of uncollectibles. Also, the
quarterly balance sheet below shows that receivable growth has significantly declined. One can also see that
long-term debt increased by $100m in 2002. However, their total long-term debt to total capital ratios is still only
at 41%, which is at the lower end of the group.
16
Balance Sheet
StockVal ®
LIFEPOINT HOSPITALS INCORPORATED (LPNT)
FYE Dec
9/03
% Chg
6/03
% Chg
3/03
% Chg
12/02
% Chg
9/02
Cash and Equivalents ($ Mil)
20.1
-89
19.5
-89
40.3
-45
23.0
-60
183.8
Trade Accounts Receivable
93.1
30
94.2
26
97.8
26
85.0
50
71.5
Inventories
21.4
26
21.1
26
21.0
27
20.5
26
17.0
161.7
-45
155.9
-47
176.9
-3
143.3
-4
292.4
Property Plant Equip Gross
672.8
15
645.0
13
625.7
13
610.2
12
584.7
Accumulated Depreciation
267.1
16
257.7
16
247.7
16
238.0
16
231.0
Property Plant Equip Net
405.7
15
387.3
11
378.0
12
372.2
10
353.7
3.8
3700
0.0
Total Current Assets
Intangibles
Total Non-Current Assets
Total Assets
Accounts Payable
Short-Term Debt
3.3
3.5
3.6
623.7
47
603.1
44
593.0
47
590.2
46
423.3
785.4
10
759.0
7
769.9
31
733.5
32
715.7
36.1
74
29.2
58
28.4
37
28.5
50
20.8
0.0
75.4
14
76.6
250.0
-8
250.0
75
250.0
67
252.9
26.4
22
25.6
15
24.9
19
22.2
4
306.0
-3
302.2
64
300.5
60
298.9
397.1
6
379.9
-3
392.5
47
375.9
48
375.5
1.5
-68
1.2
-73
0.0
Common Equity
386.8
15
377.9
20
377.4
20
Retained Earnings
117.9
91
101.6
107
97.0
386.8
15
377.9
20
377.4
785.4
10
759.0
7
769.9
Total Long Term Liabilities
Total Liabilities
Minority Interest
250.0
-1
32.0
44
311.4
0.0
8
Deferred Income Taxes
73.9
0.0
90.3
Long-Term Debt
12
0.0
-4
Total Current Liabilities
85.7
0.0
0.0
4.7
Preferred Stk - Non Redeem
Total Equity
Total Liabilities & Equity
357.6
21
335.5
88
79.3
110
61.7
20
357.6
21
335.5
31
733.5
32
715.7
I would like to see a higher cash balance than is currently carried. This low cash level will require entering the
debt or equity markets in order to fund acquisitions.
Cash Flow
What stands out here is the large use of cash from investing. LPNT has been using their cash from operations and
long-term debt for capital expenditures to renovate facilities and provide new services. They will not have to
keep spending on existing facilities at this level, allowing them to use some flow to fund acquisitions. Over the
past several quarters, they have made the competitive decision to improve facilities rather than acquire new
facilities. However, they have stated that they are actively looking at assets again.
17
Return on Equity
LPNT owes their high ROE to their high margins. This leads me to believe that LPNT is good at acquiring
facilities and focusing on increasing their efficiencies. I would rather see this trend as compared to a hospital
company that acquires more aggressively but does not focus on operating efficiencies.
StockVal®
LIFEPOINT HOSPITALS INCORPORATED (LPNT) Price 29.0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
21
18
15
HI
LO
ME
CU
12
20.0 •
-3.3
13.6
20.0
9
6
3
12-31-1997
09-30-2003
0
RETURN ON EQUITY %
16
14
12
HI
LO
ME
CU
10
8
15.8 •
-5.5
9.3
13.0
6
4
2
12-31-1994
09-30-2003
0
PRE-TAX MARGIN %
Valuation
StockVal®
LIFEPOINT HOSPITALS INCORPORATED (LPNT) Price 29.0
1999
2000
2001
2002
2003
2004
HI
LO
ME
CU
45
30
15
58.3 •
11.4
24.4
15.8
05-07-1999
11-20-2003
0
PRICE / YEAR-FORWARD EARNINGS
HI
LO
ME
CU
12
8
4
14.7 •
2.3
4.5
3.3
05-07-1999
11-20-2003
0
PRICE / BOOK VALUE
HI
LO
ME
CU
2
2.98 •
0.45
1.69
1.45
1
05-07-1999
11-20-2003
0
PRICE / SALES
HI
LO
ME
CU
24
16
8
29.7 •
5.4
11.2
7.7
05-07-1999
11-20-2003
0
PRICE / EBITDA
18
As can be seen in the previous chart, LPNT is trading below historical valuation levels. The next chart show
LPNT valuation levels in comparison to the group. Although slightly above the group on a forward P/E basis,
LPNT is still trading well below historical multiples.
StockVal®
LIFEPOINT HOSPITALS INCORPORATED (LPNT) Price 29.0
1999
2000
2001
2002
2003
2004
2.30 •
0.94
1.53
1.04
HI
LO
ME
CU
2
1
05-07-1999
11-20-2003
0
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO HOSPITALS (059A) E-Wtd
3.38 •
1.09
1.45
1.59
HI
LO
ME
CU
3
2
05-07-1999
11-20-2003
1
PRICE / BOOK VALUE RELATIVE TO HOSPITALS (059A) E-Wtd
1.83 •
0.78
1.44
1.48
HI
LO
ME
CU
1.6
1.2
0.8
05-07-1999
11-20-2003
0.4
PRICE / SALES RELATIVE TO HOSPITALS (059A) E-Wtd
4.09 •
0.93
1.32
1.03
HI
LO
ME
CU
2.4
1.6
1.2
05-07-1999
11-20-2003
0.8
PRICE / EBITDA RELATIVE TO HOSPITALS (059A) E-Wtd
Finally, LPNT is trading basically inline with the S&P 500. I think that LPNT deserves to trade at a higher
multiple given their growth prospects and positive demographic trends. LPNT’s consensus growth rate, which I
believe is conservative, of 15 is significantly higher than the S&P 500’s of 11.7.
StockVal®
LIFEPOINT HOSPITALS INCORPORATED (LPNT) Price 29.0
1999
2000
2001
2002
2003
2004
HI
LO
ME
CU
2
2.23 •
0.70
1.09
0.96
1
05-07-1999
11-20-2003
0
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
3
2
1
3.31 •
0.45
1.29
1.05
05-07-1999
11-20-2003
0
PRICE / BOOK VALUE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
1.5
1.0
0.5
1.66 •
0.20
1.01
1.01
05-07-1999
11-20-2003
0.0
PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
2.0
1.2
3.48 •
0.71
1.38
0.98
0.8
05-07-1999
11-20-2003
0.4
PRICE / EBITDA RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
19
Timing of Purchase
LPNT shares reached a bottom in early 2003 and have begun an upward trend. It may be advantageous to
purchase shares in an oversold position. However given the prospects of passage of the Medicare Drug Benefit
Bill, I do not believe another oversold position will develop soon. I would prefer to own the shares before
passage of the bill and I would buy on any weakness if the bill does not pass. In this event, rural reimbursement
rate improvements could be enacted as part of another bill.
Summary
I recommend an over weight position in LPNT and have calculated a target price of $40. I have presented
analysis on positive fundamental, economic, and demographic trends, which I believe will overcome the risks.
While having a conservative balance sheet and pricing methodology, LPNT is positioned to grow faster than the
group and the S&P 500. This unique position allows for a defensive holding with good growth aspects.
20