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MUTUAL SERIES FUNDS'
MICHAEL PRICE ET AL.
(continued from preceding
page)
Garea: In 1996, their margins are lower - as are everyone's. I think their margins are reasonably in line.
OID: And in 1996, they're...
Garea: They're like most HMOs - around 5%.
OID: Value Line shows them having net profit margins of 8.0% in 1994 and 7.7% in 1995.
Garea: Yeah. But 1995 was the last really good year. Many of these guys lost money in 1996, you know.
OID: And you're assuming $2.60 of earnings in '97?
Garea: That's right.
OID: And did I understand you to say that that's actually after significant goodwill amortization?
Garea: Correct. Prior to the merger, Health Systems had $1 of goodwill amortization. But, of course, it's going to be less than that after the merger because that amortization gets spread over more shares. Foundation had a little goodwill amortization, but not nearly as much.
OID: So cash earnings would actually be more.
Garea: I could figure it out, although I haven't yet. It's more than 50¢ and less than $1. So it's probably in the 70-75¢ range - something like that.
OID: But even if it's 70¢, you're talking earnings of $3.30 on a $24 stock - or just over 7 times earnings.
Garea: That's right.
AND EVEN IF THEY WEREN'T, NOW THEY'RE MOOT.
Garea: I assume that's because the foundation shows up as an insider. And they recently sold stock in an offering.
OID: It certainly looks like they have lots of company.
Garea: I don't know.
OID: Are there any other reasons why Health Systems is so cheap?
Garea: Not that I'm aware of. Before the offering, the charitable foundation owned pretty close to 50% of the company. Now, as I recall, their ownership is down into the low 30s. And institutional ownership is pretty concentrated. Malik M. Hasan, who's the chairman of the company, owns a big piece of it [20.8% as of year end 1995]. So, again, there's not a lot of float. As a result, people don't get too interested in it. So it's underfollowed by the Street.
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