Manor Care healthy in struggling sector

1/21/2001

Eight months ago, shareholders of Toledo-based Manor Care, Inc., wondered what had hit them. The company reported a disappointing quarterly loss and disclosed problems with patient lawsuits in Florida and rising labor costs nationwide.

Its share price crashed 38 percent in a single day, to $7.50, and continued to fall to $6.44 - quite a shock for investors who watched the stock cruise up to $33.50 a share in 1999.

But shareholders who had the nerve to hang on to their Manor Care stock now have reason to congratulate themselves. The firm - operator of 299 nursing homes and 218 other health-care facilities in 32 states - has stock trading at triple its mid-2000 price, this month topping $21 a share on the New York Stock Exchange. It closed Friday at $18.88 a share, down 50 cents, in heavy trading of 2 million shares, more than twice normal daily volume.

Manor Care's stock price has held up well in recent weeks, despite the sale of millions of shares by the Bainum family, of Maryland, in the last six weeks.

Stewart Bainum, Sr., founder of Manor Care, formerly of Gaithersburg, Md., which merged with Toledo's Health Care & Retirement Corp., recently sold 348,000 shares for about $6.8 million, according to documents filed with the Securities and Exchange Commission.

His son, Stewart Bainum, Jr., chairman of Manor Care, recently sold 2 million shares for more than $32 million. And various Bainum family foundations sold nearly 4 million shares last month for about $73 million, still leaving the family controlling about 4 percent of Manor Care's 102 million shares.

Manor Care's comeback has made it one of the leaders in the health-care sector, where there are few survivors. By the end of 2000, five of the nation's seven largest operators, awash in a sea of debt, were bankrupt, including such giants as Vencor, based in Louisville; Mariner Post-Acute Network in Atlanta; and Sun Healthcare Group in Albuquerque, N.M.

Paul Ormond, Manor Care's president and chief executive officer, said the firm's operating earnings have stabilized and the company shows “strong promise of earnings growth, and the market is starting to recognize that.”

“We have increasing confidence there will be a significant increase in earnings for 2001,” he said, noting that Standard & Poor's reaffirmed the company's investment-grade bond rating, allowing it to borrow and be “aggressive” in its growth plan. Manor Care has opened eight nursing homes in the last six months and has 10 expansions completed or under way.

“Manor Care is doing very well,” said Nancy Weaver, an analyst with Stephens, Inc., in Little Rock, Ark. “Indications are they're coming back strong in terms of better [Medicare] funding. Earnings look good.”

Perhaps equally important, she noted, the company has been able to hit earnings estimates for the last two quarters, a feat it was unable to perform early last year.

In contrast to its internal turmoil of a year ago - when a major shareholder proposed a buyout offer, only to be countered by a management buyout proposal, and both were eventually dropped - the company appears to be headed uphill.

Analysts noted that nursing-home chains should benefit greatly from more liberal Medicare reimbursements approved by Congress late last year. Congress had cut reimbursements beginning in 1998, and had mitigated the problem only slightly in 1999.

Some analysts, like Gary Taylor with Banc of America Securities in New York, believe Manor Care will do better than most of its competitors because of better management. “In my opinion, Manor Care has been far and away the best-run long-term-care company that's out there,” he remarked.

However, both Mr. Taylor and Ms. Weaver said they are still concerned about the rising level of lawsuits against nursing homes in Florida - a situation being examined by a state commission looking into tort reform. “Florida litigation is eight to 10 times the national average,” said Mr. Taylor.

Manor Care, which will report 2000 earnings Feb. 8, is on track to top $2.3 billion in revenue. Toledo's fourth-largest company missed last year's Fortune 500 list, ranking 538th, with revenue of $2.1 billion. But analysts say its growth and a recent acquisition could easily propel it to $2.6 billion or more for 2001.

The nation's largest nursing-home chain, Beverly Enterprises, Inc., of Fort Smith, Ark., reported $2.5 billion in revenue in 1999, and analysts say it is likely to end 2001 at $2.7 billion - although a planned restructuring could lower that figure. Still, Manor Care's market capitalization is about three times that of its bigger rival, and is second highest, behind Dana Corp., among Toledo area publicly traded firms.

The downtown Toledo company last month completed its acquisition of In Home Health, Inc., a Minnetonka, Minn., a firm that operates 39 offices in 15 states. That purchase adds about $100 million a year to Manor Care's revenue and brings its home-health offices up to 77. “That will be a big growth opportunity in 2001,” said Mr. Ormond.

Its nursing home occupancy rate is 87 percent, on par with its highest level in recent years, he said.

Further, the company has launched Heartland Medical Information Systems, a medical transcription firm on Executive Parkway. “It's still in the start-up [phase], but it will be a growth business by the end of 2001,” Mr. Ormond said.

Another good sign for shareholders is that all of the firm's officers have increased their stock ownership in the last 90 days, said Mr. Ormond.

Long-term stock options for top company officials are due to expire next month. So far, documents filed with the SEC show more selling than buying, but Mr. Ormond said large purchases will start showing up soon.

Mr. Ormond disclosed last month he plans to sell 50,000 shares for about $1 million, and all together top officers reported sales or planned sales of about 100,000 shares for about $1.7 million. But Mr. Ormond said those sales will finance even larger stock purchases.

He said he wasn't surprised by the Bainum family's recent stock sales. “We've always known they ultimately would sell their shares,” he said. “To be fair, one of their motives in doing the [merger] transaction was that it gave them the opportunity to take some of the money off the table.”

Chairman Bainum gave Toledo a scare last year when he proposed a buyout. Mr. Ormond countered with a buyout offer of his own, but both eventually were dismissed. For a time, many Toledoans feared the loss of Manor Care's headquarters on Summit Street in downtown Toledo and its staff of about 500.

But the building - carrying the HCR ManorCare name - still houses the company. The name of the firm and its entities is confusing to many people, but Mr. Ormond explained the seeming puzzle: “Our legal name was shortened to Manor Care, Inc., but we do business [in many locations] as HCR ManorCare. Our ticker symbol is HCR. We will keep the building name HCR ManorCare.”