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MUTUAL SERIES FUNDS'
MICHAEL PRICE ET AL.
(continued from preceding
page)
Garea: Yep.
OID: And if they're efficient operators and they're willing to operate that way, couldn't that set a ceiling on the margins their competitors can hope to earn?
Investors in Health Systems at today's price would probably still be fine. But...
Garea: I don't think you should necessarily equate Oxford's lower margins with efficiency. Remember that growth has its price.
When you're growing at 50-60% a year, there's a cost that you have to pay in order to keep up with that growth. You can't possibly run a company as efficiently as someone who's growing 10% a year.
OID: And you may be pricing more aggressively, too.
Garea: Correct. It's not that we don't like growth - because we do. However, here I can buy Health Systems growing, I think, at 20% per year for the next several years and maybe 15% per year thereafter for only about 8 times reported earnings and 7 times cash earnings.
OID: Not bad.
Garea: It works for me.
AND, LONGER TERM, IT'S A GOOD BUSINESS, TOO.
OID: At your annual meeting, Michael said that Horizon/CMS Healthcare [HHC/NYSE] was also cheap.
Garea: That's right. It's incredibly cheap, too. Horizon runs nursing homes. And nursing home stocks have been battered because of a series of pronouncements out of HICVA - which is the federal agency which sets government rules for Medicare and so forth regarding reimbursement rates for different rehabilitation subacute kinds of therapies - which all of the nursing homes are in. Horizon and others have been under a cloud because of some different kinds of OIG investigations relating to various things that we just don't think are that significant.
OID: So Horizon is cheap because of industry fears?
Garea: In part. Plus, they made an acquisition which most people, including us, didn't think made sense - although we didn't own it then. And it caused them a bunch of problems. They bought a company called Continental Medical that's in the rehabilitation/therapy business - acute care, outpatient and subacute - and in contract therapy.
And, finally, they're in the pharmacy business - they provide pharmacy services to their own nursing homes and other smaller nursing homes that can't afford to be in that business on their own. It's just cheaper to outsource it.
OID: Quite an array of businesses...
Garea: Yes, indeed. So now Horizon's businesses need to be rationalized. They have to figure out which
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