INVESTMENT OPINION
LifePoint Hospitals, Inc. operates a strong portfolio of 20 hospitals located in non-urban markets. In third quarter 2000, the company had total debt/pro forma EBITDA of 2.98 times, a significant improvement over 4.8 times in first quarter 1999, with an 18.9% pro forma EBITDA margin and pro forma EBITDA/interest of 3.39 times. Despite these impressive results, the company believes it can expand EBITDA margins even further, with the goal of achieving margins of 20% to 25%. Furthermore, we believe the company can improve EBITDA margins by 100 to 150 basis points in its core hospitals and by 200 basis points in its newly-acquired facilities. LifePoint has also been able to improve cash flow through a reduction in accounts receivable. In third quarter 2000, DSOs were 30 days, the best in the industry—and an improvement over 38 days in the year-ago quarter.
The company continues to drive volume through physician recruitment and expansion of medical services, thereby working to prevent out-migration. By shifting the physician mix towards obtaining specialists with higher acuity cases and by renegotiating managed care contracts, the company has successfully garnered price increases of 5% to 10%. With expense controls and favorable managed-care pricing trends of 5% to 8%, we expect the company to end 2000 with interest coverage of 3.4 times and debt leverage of 2.8 times. Our fiscal 2001 estimate calls for interest coverage to improve to 3.9 times and for debt leverage to decline to 2.3 times. The company’s disciplined acquisition strategy of one to two hospitals per year limits integration risk. Furthermore, with the company’s improved credit statistics of interest coverage of 3.39 times and debt leverage of 2.98 times, we believe the bonds are overdue to be upgraded by the rating agencies. Although the bonds are trading at 406 basis points, we feel that these bonds could tighten by another 50 to 70 basis points.
An additional upside not included in our projections could be derived from pending legislative relief, including a market basket update for 2001 and 2002 and wage index improvements for rural hospitals. Additionally, a pending adjustment in the disproportionate share hospital (“DSH”) threshold (which provides additional funding for low-income and uninsured patients) for rural hospitals may occur, from 42% to 15%. The company currently has four hospitals that qualify for DSH; we would expect most of its facilities to qualify if the threshold is adjusted.
KEY POSITIVES
Strong Portfolio of Hospitals
LifePoint has a solid portfolio of 20 hospitals, 19 of which are the dominant or sole healthcare providers in their respective communities. The company owns all of its own facilities. Approximately 80% of the company’s beds are located in states that possess Certificate of Need (“CON”) laws limiting a hospital’s ability to expand services and add new equipment, thereby effectively limiting direct competition. Following the recent the sale of Springhill Medical Center, approximately 80% of the company’s facilities are located in CON states.