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MUTUAL SERIES FUNDS'
MICHAEL PRICE ET AL.
(continued from preceding
page)
And, meanwhile, they've also been beaten down because of fears about inadequate reimbursement rates and all of this investigation stuff that I mentioned earlier.
OID: Sounds pretty nasty all right.
Garea: It sounds that way. But we think they're overblown.
So we believe these things are way too cheap. And we believe that the nursing home business, longer term, is a good business. So we want to be there.
OID: At today's price?
Garea: Well, we actually started buying Horizon in the mid-teens in March - although we bought very little then. But from $13 down to $10, we bought a lot more - until we probably own 8-9% of the company today.
OID: And Horizon's current price?
Garea: It's at $11 and change.
BUT NOW THE MUSIC'S STOPPED.
Garea: That's right.
OID: By what measure?
Garea: Enterprise value to operating cash flow, earnings - you name it.
OID: We asked first.
Garea: It trades at 10 times reported 1997 earnings and 6-7 times operating cash flow.
OID: For Horizon to be fairly valued, what should those multiples be?
Garea: It depends on who's operating the assets and what they're doing with 'em. These are all businesses that have excellent growth prospects and big advantages. And some of them - like Genesis and Multicare - trade at 18; 19 or even 20 times earnings. But they have better margins, they're growing faster, and they're just better run generally.
OID: I see that. Horizon's returns on capital and equity look very unimpressive. And they've increased their shares outstanding by nearly 700% since 1987.
Garea: All of these guys began as little start-up companies and grew like weeds by acquiring other things. And they kept using stock because they traded at such high P/E multiples.
OID: Which may explain how their book value could compound at more than 18% per year since 1987 despite the company having earned single-digit returns on equity for most of that time.
Garea: The nursing home business is capital intensive.
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