PROVINCE HEALTHCARE
NYSE: PRV
March 16, 2003
Sector: Healthcare Industry: Healthcare Facilities
Analysts:
§ Chinyere Okoro
214.768.6531
cokoro@mail.smu.edu
§ Ivan Ossa
972.315.4939
iossa@hotmail.com
Price:(Jan 24-03) $8.50
Price Target:
$4.43
52- Week Low: $ 5.29
52- Week High: $27.12
Credit Rating:
B+ (High-Yield)
COMPANY PROFILE:
Province Healthcare Company owns and
operates acute care hospitals located in nonurban markets. The Company owns or leases
19 general acute care hospitals in 11 states
with a total of 2,156 licensed beds. In
addition, the Company provides management
services to 35 primarily non-urban hospitals
that it does not own or lease in 13 states, with
a total of 2,776 licensed beds. The Company
targets hospitals for acquisition that are the
sole or primary provider of healthcare in the
non-urban communities that they serve.
Province Healthcare's general acute care
hospitals typically provide a full range of
services commonly available in 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.
(Source: Multex Investor)
PROVINCE HEALTHCARE:
NOT A HEALTHY OUTLOOK!
Recommendation: SELL
§
§
§
§
§
1,350 Shares @ $11,475 MV
Physician & Management Turnover has not allowed
Province to realize a stability that could reflect in its
financials.
Ratio analysis, comparables, and DCF together
present Province Healthcare as the weakest, least
efficient player.
Although it’s business strategy revolves around
investments, the ROA for the firm is 3.54% less than
the industry average.
On earnings the company looks consistent but there
was been a heavy increase of goodwill which hasn’t
been written down.
We believe this firm will not be able to overcome any
time soon its difficulties with profitability, efficiency,
and client and employee retention.
PRICE CHART: LAST SIX MONTHS
Key Financial Information
Source: Multex.com
Shares Out.
$
Market Cap
$
EPS(2002)
$
EPS - 5 yr Growth R.
Province
P/E
13.51
P/B
0.999
P/S
0.606
ROE
8.70%
BETA
0.44
Source: Multex.com
Province
48,580,000
401,290,000
0.72
25%
Industry Sector S&P500
17.32
22.23
22.23
2.9
6.25
4.17
1.08
5.07
2.9
18.06% 25.68% 18.38%
0.37
0.56
1.00
A CHEAP BUY OR A BAD BUY?
P/E
P/ERatio
Ratio(TTM)
(TTM)
Price
Priceto
toSales
Sales(TTM)
(TTM)
Price
Priceto
toBook
Book(MRQ)
(MRQ)
Return
ReturnOn
OnAssets
Assets(TTM)
(TTM)
Return
ReturnOn
OnInvestment
Investment(TTM)
(TTM)
Receivable
ReceivableTurnover
Turnover(TTM)
(TTM)
Inventory
InventoryTurnover
Turnover(TTM)
(TTM)
Company
Company Industry
Industry Sector
Sector
11.49
17.32
11.49
17.32 22.23
22.23
0.65
1.08
0.65
1.08 5.07
5.07
0.97
2.9
6.25
0.97
2.9
6.25
4.01
7.55
4.01
7.55 10.71
10.71
4.31
9.64
4.31
9.64 16.03
16.03
5.93
8.11
5.93
8.11 7.37
7.37
8.7
24.39
8.7
24.39 4.45
4.45
S&P500
S&P500
22.23
22.23
2.9
2.9
4.17
4.17
6.32
6.32
10.21
10.21
9.55
9.55
10.98
10.98
Are these ratios a signal that this is
a cheap company? Yes, but why is
this company so cheap when
compared to its industry, Sector,
and broad market?
The company is not cheap; it just
can’t make an impress ive return on
its assets and investments. Further,
it’s weak in bringing in business,
which results in low inventory
turnover and to top it off it collects
slower then industry, sector, and
broad market.
§ Emphasis is placed in the ratios above because although the company
continuously invests in hospitals in urban areas, it can’t return
efficiently on the assets that it already owns or those that are
purchased as potential generators of upside in revenues.
§ The trouble areas outlined by the quantitative analysis in the last two
lines is further supported by their inability to retain profit-generating
physicians (low inventory turnover) and they have can’t collect
efficiently (receivable turnover) because of the ongoing heavy
litigation that the company encounters.
The traits observed above are not exclusive to the industry, as the industry was able to
outperform Province in every valuation above. However, industries are a conglomerate of
companies that don’t necessarily specialize in the same business, same strategy, and same service.
Below Province’s competitors, pursuing the same market with a similar strategy and with a similar
structure are evaluated. The numbers below should be viewed as a tool to get a better
understanding of Province and not to determine that it is better or worse than the other companies
as there are not two identical companies.
P/E
P/E (2002)
(2002)
Price
Priceto
toBook
Book(P/B)
(P/B)
Price
Priceto
toSales
Sales(P/S)
(P/S)
PRV
PRV
13.51
13.51
1.00
1.00
0.61
0.61
CCYYHH
17.01
17.01
1.49
1.49
0.80
0.80
HMA
HMA
17.72
17.72
3.12
3.12
1.86
1.86
HCA
HCA
25.25
25.25
3.60
3.60
1.05
1.05
ROE
ROE
ROA
ROA
8.70%
8.70%
3.72%
3.72%
8.90%
8.90%
3.80%
3.80%
18.20%
18.20%
10.40%
10.40%
14.50%
14.50%
4.50%
4.50%
93.07%
93.07%
0.90
0.90
3.10
3.10
117.00
117.00
6.10
6.10
59.84
59.84
71.07%
71.07%
1.00
1.00
8.30
8.30
43.98
43.98
5.60
5.60
65.18
65.18
83.94%
83.94%
1.10
1.10
11.60
11.60
31.47
31.47
7.20
7.20
50.69
50.69
GP
76.21%
GPMargin
Margin
76.21%
Total
Asset
Turnover
0.70
Total Asset Turnover
0.70
Inventory
8.18
InventoryTurnover
Turnover
8.18
Day's
44.61
Day'ssales
salesin
ininventory
inventory
44.61
Receibable
5.80
Receibableturnover
turnover
5.80
Day's
Day'ssales
salesin
inreceivables
receivables 62.93
62.93
Community Health Systems is a non-urban provider of general
hospital healthcare services in the United States. CHS owns, leases
or operates 57 hospitals, geographically diversified across 20
states. For the 9 months ended 9/30/02, revenues rose 33% to
$1.62B.
HMA provides general acute health services in no urban locations through the operation
of 41 general acute care hospitals and two psychiatric hospitals. For the 3 months
ended 12/31/02, revenues rose 23% to $609.4M.
HCA Inc. is a healthcare services company that operates 184 hospitals and 79 surgery centers in 23
states. For the FY ended 12/31/02, revenues rose 10% to $19.73B.
From a competitive
perspective is seems that
Province
is
trading
cheaper than its direct
competitors.
At the competitive level,
this
illustrates
that
province
cannot
generate comparable
returns or margins.
Efficiency! Province is
just not as efficient as its
competitors. It can’t
collect as fast, it can
service as fast, and it
doesn’t maximize its
assets to produce sales.
Conclusion:
With the similarities with
its competitors, yet
comparative
underperformance,
Province appears to be
a bad buy.
PRICING PROVINCE
Province doesn’t pay a dividend and with negative un-levered free cash flows, it seems that there
is not a real straightforward way of pricing this firm. Although the analysis below is not as
precise in giving an assessment of this firm, with the observations previously presented, they do
provide further proof that this company should be sold.
§ Comparable Valuations:
Industry P/E:
Earnings per share (2002)
P/E Valuation:
Indsutry P/S:
Sales per share**
P/S Valuation:
Indsutry P/B:
Equity BV (per Share)**
P/B Valuation:
17.32
$
$
0.72
12.47
1.08
$
$
14.02
15.14
2.90
$
$
8.51
24.67
Comparables show that the company should be trading
higher than its current price when compared to the
industry; however, through the previous ratio analysis we
discover that we cannot expect performance by this firm
to be similar to that given by its competitors. We find
these prices to be inflated as related to Province because
of the management, legal, and efficiency prob lems
outlined in the quantitative information and detailed in
the qualitative portion.
§ Discounted Free Cash Flow:
Net cash Operating Activities
Plus After Tax Interest Expense
Minus Net Cash in Investing Activities
Unleaved Free Cash Flows:
BV Equity
BV Bonds
W Equity
W Debt
WACC=
Kd
Ke
2003
58,955,520
7,865,000
66,820,520
109,980,000
(43,159,480)
360,000,000
397,900,000
0.47
0.53
4%
3.83%
6.71%
Present Value of Free Cash Flows:
2001 Ignore
-123,535,000
2002 Ignore
-100,715,000
1
-43,159,480
2
-32,488,531
3
-19,886,140
4
-5,002,716
5
12,574,607
Terminal Value:
Shares Out
2001
2002
38,400,000
49,920,000
7,865,000
7,865,000
46,265,000
57,785,000
169,800,000 158,500,000
(123,535,000) (100,715,000)
866,794,330
48,600,000
613,163,296
397,900,000
$215,263,296
$4.43
-41,303,221
-29,754,010
-17,429,047
-4,196,012
705,845,587
613,163,296 PV
2004
69,626,469
7,865,000
77,491,469
109,980,000
(32,488,531)
Key Assumptions:
8.39
0.7
3%
18.1%
397,900,000
0.15%
4.30%
47%
53%
35%
3.70%
2005
82,228,860
7,865,000
90,093,860
109,980,000
(19,886,140)
2006
97,112,284
7,865,000
104,977,284
109,980,000
(5,002,716)
2007
114,689,607
7,865,000
122,554,607
109,980,000
12,574,607
Market stock price on March 5,2003
Beta
Terminal Growth
Forcasted 5 year sales growth rate
Interest Bearing Debt (Book Value)
Actual Return on Salomon Smith Barney BBB
Market Risk Premium
Weight of Equity
Weight of Debt
Tax rate
Risk-free rate
Value of Firm (PV)
Value of Inter. bearing debt
Value of Equity
Intrinsic Value of the stock
A quantitative analysis of Province revealed that its shares are overpriced at $8.39. A more reasonable target price
per share would be $4.43. This value takes into account that Province should expect higher revenues in the future and
also slightly lower amounts of capital expenditure to mirror previous years expenses. Overall, Province is not efficiently
run. It has not generated enough sales compared to its assets. Our analysis shows that revenue would have to increase
at an estimated 18.1% for the next 5-years to eventually produce positive cash flows. However, this 18.1% increase is
sales is quite bullish considering the huge loss in physicians, who are responsible for a large parentage of revenue.
When calculating the cost of equity financial resources revealed a beta of .44. However, because Province and other
health companies have experience a variety of changes from being overvalued due to the economic growth of the ‘90s
and then being severely beaten down by the Tenet Healthcare Investigation, a more accurate beta would reflect a
convergence towards the mean. Therefore, an average of .44 and 1 is used to yield a beta of 0.7. Province could
generate positive cash flow if it is managed well. However, positive cash flows will not be realized in the next one to
two years. This time range more than exceeds our portfolio’s time horizon of a year.
HEALTHCARE OUTLOOK
§
§
§
§
§
The U.S. healthcare sector is the largest in the world, worthy an esti mated $1.4 trillion. However rising
demand for healthcare service has negatively affected the sector. Companies are finding it harder to
operate due increased federal regulation, uncontrollable costs, and prolonged personal shortages.
The federal government has been diligently to reform the healthcare system. Its goal is to turn it into a
fine tuned machine that creates satisfaction for all who participate form the healthcare companies to
patients to the people who actually practice within the system. Healthcare companies have
encountered tremendous amounts of scrutiny due to doctor’s misdeeds and insurance fraud. Increased
federal investigations have created uncertainty within the whole industry. Possible changes in the
levels and terms of reimbursements for government programs such as Medicare and Medicaid have
caused managers to reduce estimates on expected income from third parties. This will hinder
healthcare companies because they receive more then 70% of revenue from Medicare and Medicaid.
People are living longer and need more care. Taking care of patients requiring expensive drugs and
other care drains budgets. Cutbacks prescribed in the 1997 Balanced Budget Act didn’t help. Starting
in 1998, per-day cost caps have been implemented for service providers covering a percentage of
the costs and not the total cost of care.
The sector as a whole has experienced a challenge in attracting and retaining qualified people. We
have specifically seen this challenge in the nursing sector, where it is reported by Bain & Company that
7% of nursing spots will remain unfilled in 2003. Also, with no resolution is in sight regarding caps on
malpractice damage awards keeping healthcare specialist will become more challenging.
Premiums are projected to jump 16% which is a 4th consecutive year double digit rate hikes which
creates harder decisions for employers which is to shoulder the cost increase or push more of the cost
to employees. The constant demand of quality care, particularly from the aging baby boomers
generation, involves more expensive and frequent treatment. Home Healthcare companies also face
large investment of acquiring and operating hospitals, which has put a strain on operating income.
BUSINESS STRATEGY & OUTLOOK
POSITIVE A SPECTS
•
New human resources manager is expected to evaluate recruiting practices to attract individuals
who are qualified and will remain with the company on a long- term basis.
NEGATIVE ASPECTS
•
•
•
•
Zacks.com, an informative website operated by Zacks Investment Research, issued a strong sell
recommendation for Providence Healthcare due to its inability to meet analysts’ estimates and
sustain the previous year’s earnings. Providence continues to have difficulty retaining vital
physicians. It also has encountered increased competition in ambulatory surgery center and has
major costs from settlements to handle. It does see slight growth in the long-term however earnings
estimates for this year and next remain low.
In less then two years, Providence has named a new president and has had two chief financial
officers. This instability in management has lead to reduced investor confidence. Confidence levels
can only be restored with time and through proven performance.
Providence transferred from the Nasdaq to the New York Stock Exchange. This was a move that
occurred in the middle of 2002. The objective was escape the possible taint of being associated
with the Nasdaq, which find itself closely connected with the collapse of technology stocks.
Providence hoped to benefit from the prestige of the New York Stock Exchange and also realize
trading efficiencies. However, currently Providence has found itself in the same position it was in
on the Nasdaq.
The outlook for the first two quarters in 2003 has been lowered due to a large loss in physicians in
2002. New physician have been hired to replace those doctors however, as stated by the
Chairman and Chief Executive Martin S. Rash, “they had not been in practice long enough to build
practices and revenues sufficient to meet our historic growth metrics"
In Millions of U.S. Dollars
(except for per share items)
Cash & Equivalents
Cash and Short Term Investments
Accounts Receivable (Trade), Net
Total Receivable, Net
Total Inventory
Prepaid Expenses
Other Current Assets, Total
Total Current Assets
ANNUAL BALANCE SHEET
As of
As of
As of
As of
As of
12/31/02 12/31/01 12/31/00 12/31/99 12/31/98
14.4
39.4
0.0
0.0
2.1
14.4
39.4
0.0
0.0
2.1
117.4
109.8
89.2
84.3
53.1
117.4
109.8
89.2
84.3
53.1
19.8
15.9
11.8
11.1
7.1
14.1
21.5
7.3
6.5
10.2
–
–
–
–
–
165.8
186.6
108.3
101.9
72.5
Property/Plant/Equipment - Total Cost
Accum. Deprec. Total
Property/Plant/Equip., Net Total
Goodwill, Net
Intangibles, Net
Long Term investments
Other Long Term Assets, Total
Total Assets
–
–
447.4
319.4
–
–
39.2
971.7
364.3
(57.8)
306.5
180.5
–
–
86.3
759.9
246.0
(35.7)
210.3
183.3
–
–
28.9
530.9
213.0
(26.9)
186.1
193.9
–
–
15.7
497.6
127.4
(15.2)
112.1
142.0
–
–
12.7
339.4
20.2
38.6
–
1.7
60.4
17.5
31.0
–
1.9
50.4
12.4
30.4
–
2.2
44.9
14.9
25.3
–
2.2
42.5
6.8
13.2
–
1.8
21.8
Long Term Debt
Capital Lease Obligations
Total Long Term Debt
461.6
–
461.6
330.8
–
330.8
162.1
–
162.1
260.0
–
260.0
134.3
–
134.3
Total Debt
463.2
332.7
164.3
262.2
136.1
Deferred Income Tax
Minority Interest
Other Liabilities, Total
Total Liabilities
–
2.6
33.9
558.5
–
2.7
14.0
397.9
–
1.8
7.3
216.1
–
0.8
10.0
313.3
–
0.7
13.4
170.2
Redeemed Preferred Stock, Total
Preferred Stock (Non Redeemable), Total
Common Stock, Total
Additional Paid-In Capital
Retained Earnings/Accum. Deficit
Treasury Stock Common ($ Amount)
Other Equity, Total
Total Equity
–
–
0.5
304.1
108.6
–
–
413.2
–
–
0.5
288.9
73.5
–
(0.9)
362.0
–
–
0.3
273.9
40.5
–
0.0
314.7
–
–
0.2
163.5
20.6
–
–
184.4
–
0.0
0.2
162.9
6.1
–
–
169.2
Total Liability & Shareholders' Equity
971.7
759.9
530.9
497.6
339.4
S/O-Common Stock
Total Common Shares Outstanding
48.58
48.58
47.49
47.49
46.36
46.36
35.42
35.42
35.34
35.34
–
–
5,892
899
4,132
768
3,324
320
2,785
251
Accounts Payable
Accrued Expenses
Notes Payable/Short Term Debt
Current Port. LT Debt/Capital Leases
Total Current Liability
Employees
Number of Common Shareholders
In Millions of U.S. Dollars
(except for per share items)
Revenue
Other Revenue, Total
Total Revenue
ANNUAL INCOME STATEMENT
12 Months 12 Months 12 Months 12 Months 12 Months
Ending
Ending
Ending
Ending
Ending
12/31/02 12/31/01 12/31/00 12/31/99 12/31/98
680.9
509.1
463.9
343.3
235.8
23.5
21.7
6.0
3.4
3.1
704.3
530.7
469.9
346.7
238.9
Cost of Revenue
Gross Profit
162.0
518.9
110.1
399.0
109.3
354.6
85.1
258.3
59.0
176.7
Selling/General/Admin. Expenses, Total
Research & Development
Depreciation/Amortization
Interest Expense, Net Operating
Interest Expense/Income, Net
Unusual Income/Expense
Other Operating Expenses, Total
Total Operating Expense
277.8
–
34.2
22.0
22.0
–
148.2
644.2
205.6
–
30.2
12.1
12.1
–
116.0
474.0
180.9
–
26.6
16.7
16.7
–
101.7
435.2
139.2
–
19.7
13.9
13.9
–
63.2
321.0
95.0
–
13.4
10.6
10.6
–
43.0
220.9
Operating Income
60.2
56.7
34.7
25.6
17.9
Interest Expense/Income, Net Non-Op.
Gain/(Loss) Sale of Assets
Income Before Tax
–
–
60.2
–
–
56.7
–
–
34.7
–
–
25.6
–
–
17.9
Income Tax - Total
Income After Tax
24.1
36.1
23.8
32.9
14.7
19.9
11.1
14.5
7.9
10.0
Minority Interest
Equity In Affiliates
Net Income Before Extra. Items
–
–
36.1
–
–
32.9
–
–
19.9
–
–
14.5
–
–
10.0
Accounting Change
Discontinued Operations
Extraordinary Item
Net Income
–
–
–
36.1
–
–
–
32.9
–
–
–
19.9
–
–
0.0
14.5
–
–
0.0
10.0
Preferred Dividends
Inc Avail To Com Ex XOrd
–
36.1
–
32.9
0.0
19.9
0.0
14.5
(0.7)
9.3
Inc Avail To Com In XOrd
36.1
32.9
19.9
14.5
9.3
Basic/Primary Weighted Average Shares
Basic/Primary EPS Excl. Extra Items
Basic/Primary EPS Incl. Extra Items
48.15
0.750
0.750
47.09
0.699
0.699
42.99
0.464
0.464
35.38
0.410
0.410
30.02
0.310
0.310
Dilution Adjustment
Diluted Weighted Average Shares
Diluted EPS Exl. Extra Items
Diluted EPS Incl. Extra Items
–
49.45
0.730
0.730
–
48.89
0.673
0.673
–
44.69
0.446
0.446
–
36.03
0.403
0.403
–
30.76
0.303
0.303
DPS-Common Stock
Gross Dividends Common
0.000
0.0
0.000
0.0
0.000
0.0
0.000
0.0
0.000
0.0
–
–
–
–
8.5
24.5
0.520
0.500
5.9
14.1
0.327
0.313
1.8
12.7
0.360
0.351
1.4
8.6
0.284
0.280
22.0
–
34.2
12.1
(1.3)
23.7
16.7
(1.0)
20.0
13.9
(0.4)
14.0
10.6
(0.3)
13.4
(0.1)
60.1
(0.0)
24.0
36.1
36.1
0.749
0.2
56.9
0.1
23.9
33.0
33.0
0.701
6.0
40.7
2.5
17.3
23.4
23.4
0.544
0.0
25.7
0.0
11.2
14.5
14.5
0.410
0.0
18.0
0.0
7.9
10.0
9.3
0.311
Stock Based Comp Expense
Net Income after Stock Based Comp. Exp.
Basic EPS after Stock Based Comp. Exp.
Diluted EPS after Stock Based Comp. Exp.
Interest Expense
Interest Capitalized
Depreciation
Total Special Items
Normalized Pre-Tax Income
Effect of Sp.Charge on Inc.Taxes (Anlst)
Inc Tax Ex Impact of Sp Items
Normalized Income After Taxes
Normalized Inc. Avail to Com.
Basic Normalized EPS
ANNUAL CASH FLOW STATEMENT (Indirect Method)
In Millions of U.S. Dollars
(except for per share items)
12 Months 12 Months
Ending
Ending
12/31/01
12/31/00
12 Months 12 Months
Ending
Ending
12/31/99
12/31/98
Net Income/Starting Line
32.9
19.9
14.5
10.0
Depreciation/Depletion
30.2
26.6
19.7
13.4
Deferred Taxes
6.5
(5.3)
1.4
0.9
Non-Cash Items
49.7
49.6
23.6
17.8
(80.8)
(58.2)
(40.3)
(46.3)
38.4
32.7
19.0
(4.1)
Capital Expenditures
(72.2)
(44.0)
(20.9)
(15.5)
Other Investing Cash Flow Items, Total
(97.6)
3.4
(119.2)
(130.8)
(169.8)
(40.7)
(140.1)
(146.4)
0.0
0.1
0.0
–
–
–
–
–
12.0
105.3
0.5
105.1
Issuance/Retirement of Debt, Net
158.8
(97.4)
118.5
43.4
Cash from Financing Activities
170.8
8.0
119.0
148.5
Changes in Working Capital
Cash from Operating Activities
Cash from Investing Activities
Financing Cash Flow Items
Dividends Paid
Issuance/Retirement of Stock, Net
Foreign Exchange Effects
Net Change in Cash
Cash Interest Paid (Indirect Format)
Cash Taxes Paid (Indirect Format)
–
–
–
–
39.4
0.0
(2.1)
(2.1)
9.7
16.9
13.3
9.3
28.2
9.9
9.4
5.1