✯
✯
2003 National Health Policy ✯Conference
January 22-23, 2003
J.W. Marriott
Washington, D.C.
National Health Policy
Conference
January 22, 2003
A.J. Rice
Merrill Lynch
Outlook- Will “More of the Same” Be Enough?
1) Tenet’s problems have rekindled old fears about the group (i.e.
that positive fundamentals can change abruptly);
2) Excluding company-specific issues, fundamentals generally
remain positive:
z
z Medicare Reimbursement Backdrop Stable,
z
z Commercial Pricing Remains Strong,
z
z Volume Gains Offer Potential Positive Surprise,
z
z Acquisition/Consolidation Activity Robust, and
z
z Tightening Supply/Demand A Long-Term Positive;
3) Meanwhile, valuations have returned to well below average;
4) In midst of sluggish economic rebound, quality providers
should still outperform broad market (S&P 500).
Current Hospital Stock Investment Cycle
80%
60%
40%
Hospitals
20%
S&P 500
0%
-20%
2001
2000
-40%
•Initial investor buy-in that
recovery underway
-60%
2nd Half 1999
1998- 1st Half 1999
•Lessening investor interest
•Downward estimate revisions
•Declining valuations
•Regulatory Scrutiny at its height
•Investor
Capitulation
•Earnings
Bottoming
•Trough Valuations
•BBRA Passes
11/99
•Stocks perceived to be
attractive by value investors
•Benefits of BBRA begin
•Earnings stabilize and
positive surprises begin
•2nd relief package (BIPA)
passes in December
•Stocks consolidate as
incremental investor shifts to
growth from value
•Fed cuts rates in Jan.
•Investor opinion diverges
regarding economic outlook
2002
•After three quarters of
outperformance versus the
broad market, news from
Tenet and Province push
share prices down.
•Companies continue to meet •Positive earnings trends
continue
and beat estimates
•Valuations fall back below
•Valuations fluctuate and
historic average
volatility increases
•Stocks end year cheaper than
they started
2003 - ?
•Investors regain confidence
in names
•Positive earnings trends Companies continue to meet
and beat estimates
•Valuations return to historic
average
•Wider investor participation
in sector
Hospital Group Always Has its Challenges
Major Perceived Challenges Relate Principally to
Government Issues
„
Perception that Washington reimbursement environment
may worsen given re-emergence of federal budget deficit
„
Regulatory backdrop could also worsen because of
Tenet Medicare outlier controversy
„
Re-emergence of adverse media scrutiny and focus
„
Medical malpractice-related concerns/headlines
„
Federal Trade Commission review of hospital mergers
Many Not-For-Profits Lack Access To Capital
Moody’s NFP Hospital Debt Changes
70
60
Upgraded
Downgraded
50
40
30
20
10
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
“A
“A decade
decade from
from now,
now, itit would
would not
not be
be surprising
surprising ifif all
all non-profit
non-profit hospitals,
hospitals,
except
except those
those with
with generous
generous patrons
patrons or
or unusually
unusually competent
competent
management,
management, were
were closed
closed or
or sold.”–
sold.”– The
The Economist;
Economist; January
January 27,
27, 2001
2001
Source:
Source: The
The Economist;
Economist; January
January 27,
27, 2001.
2001.
Relative P/E
Average
12/01/02
09/02/02
06/02/02
03/02/02
12/01/02
09/01/02
06/01/02
03/01/02
12/01/00
09/01/00
06/01/00
03/01/00
12/01/99
09/01/99
06/01/99
03/01/99
12/01/98
09/01/98
06/01/98
03/01/98
12/01/97
09/01/97
06/01/97
03/01/97
12/01/96
09/01/96
For-Profit Hospital Stock Valuations Highly
Volatile (P/E Relative to S&P 500)
1.80
1.35
0.90
0.45
Hospitals Have Outperformed Over The LongTerm
900
800
700
600
500
400
300
200
100
S&P 500
Hospitals
11/30/02
07/18/01
03/05/00
10/22/98
06/09/97
01/26/96
09/13/94
05/01/93
(100)
12/18/91
0
“Sometimes things don’t work as expected.”
National Health Policy
Conference
January 22, 2003
A.J. Rice
Merrill Lynch