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MUTUAL SERIES FUNDS'
MICHAEL PRICE ET AL.
(continued from preceding
page)
ONLY NOW IT'S EXTRAORDINARILY SO.
Garea: Health Systems International is acquiring Foundation Health in a stock for stock swap. It's paying 1.3 shares of its stock for each share of Foundation. So Health Systems will be the surviving entity. And its management will manage the surviving company.
The two of them together are an interesting pair in the sense that Health Systems was very thin - there wasn't much float. A charitable foundation owned a big part of it. And we bought a lot of Health Systems International in a public offering from that foundation - I think we bought it at $30 - and we bought more as it went lower. And it's at $24 today. So it hasn't exactly done well.
OID: Those are our favorites.
Garea: Ours, too. And we owned it before - we bought it in the mid-$20s or thereabouts. But we bought more at $30. Then there was this big correction in HMOs.
OID: So Health Systems' decline is industry-related?
Garea: Absolutely. They've pretty much delivered OK numbers that were reasonably in line with expectations. But it was taken down with the whole group.
Then they announced this deal with Foundation. At that time, Health Systems was at $27. And now it's down to $24. And I think the reason why is that it's underfollowed. Nobody pays any attention to it because Health Systems is very thin. And Foundation has a very checkered past. People don't like the management. They don't trust 'em. The CEO is not highly regarded. People think that they were playing games with their numbers.
OID: Were they?
Garea: To some extent. But the area that was focused on most was the workers' comp business. And we've always felt that their workers' comp business was fine and that, in fact, they'd actually done a very good job in that area.
But if you put these two companies together, look at what they can earn, and give 'em even modest credit for taking out costs, they're mighty cheap today.
OID: How cheap?
Garea: Health Systems was going to earn $2 in 1996 and $2.40 on its own in 1997. So the combined company will probably earn $2.60 in 1997. And the stock's at $24. What is that - 9 times earnings?
OID: About 9-1/4. But is that good?
Garea: For a 20%+ earnings grower? You tell me. And something that's really interesting - to me, at least - is that Health Systems' earnings are net of $1 per share or so of goodwill amortization. So their cash earnings are actually much higher.
OID: That is really interesting.
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