The following article is a reprint of my 26 August 2008 RealMoney column.

Since 2001, hospital stocks have been looking green around the gills. Shares of LifePoint (LPNT) , Universal Health Services (UHS) and Community Health (CYH) have pretty much gone nowhere. Tenet Healthcare (THC) and Health Management Associates (HMA) look even worse, having lost more than 50% of their value.

That may be about to change. As I have noted before, employment statistics show hospitals as being one of the few industries reporting significant hiring. Unfortunately, I believe the lean years have left analysts who are covering the stocks too shell-shocked to notice improving fundamentals.

Evidence of the high degree of skepticism can be found in a Forbes article published on Aug. 8, when LifePoint issued a positive earnings report and raised guidance. The article focused on declining admissions and fears that a sinking economy could increase bad-debt expense. JPMorgan analyst Dawn Brock was quoted as saying, “We are concerned about the sustainability of margins given the weak admissions growth, especially as we do not believe the company can continue to see bad debt improvement given the overall macro environment.” Stifel Nicolaus analyst Robert Hawkins said the company had done a poor job of managing its expenses.

Investors weren’t listening to the analysts. LifePoint shares soared 10% on the increased guidance and have held steady since. I believe the company’s strategy may finally get the shares out of their multiyear rut. If I’m right, the analysts covering the name will probably be the last to hear about it.

Better Than Its Price

LifePoint operates hospitals in non-urban communities in 17 states. Of the company’s 48 hospitals, 44 are in communities where LifePoint is the sole community hospital provider. Its strategy is to increase the services available at such hospitals to capture more of the revenue opportunity in these communities. On the recent conference call, LifePoint CEO Bill Carpenter said that “early deep dive hospitals have already through the first six months of the year met or exceeded their full year 2008 targets.”

Even after the 10%, rally the shares certainly don’t seem excessively priced. At less than 13 times the 2009 consensus earnings estimates, many would likely consider them cheap. Given that the company has exceeded earnings estimates in three of the last four quarters, the current consensus estimates could be too low. That would make the shares cheaper still.

The earnings also translate into strong free cash flow, measured as cash from operations less capital expenditures. Over the last 12 months, LifePoint’s free cash flow totaled $127 million, or 6.9% of the company’s market capitalization. With five-year Treasuries yielding barely more than 3%, that represents a pretty healthy risk premium, even before considering growth opportunities due to the company’s strategy.

Analysts expect LifePoint to increase earnings by 10% annually over the next three to five years, a rate that is in line with the company’s sustainable growth rate on the basis of fundamentals. Meanwhile, at 1.2 times book value, it is trading well below the industry average of 2.1 times.

If earnings grow as expected and the price/book multiple expands to the industry average multiple over the next five years, total returns could approach 25% per year.

Maybe by then the analysts will have caught up to the story.

My latest column is up at RealMoney.

DaVita (DVA) is a leading provider of dialysis services in the U.S. for patients suffering from chronic kidney failure, also known as end-stage renal disease, or ESRD. As of Dec. 31, 2007, the company operated or provided administrative services to 1,359 outpatient dialysis centers serving about 107,000 patients.

The total ESRD market is estimated at 340,000 patients and is growing 3% to 4% annually. DaVita and its largest competitor, Fresnius Medical Care (FMS) , together control 65% of the dialysis market.

Over the last 12 months, DaVita’s free cash flow (cash flow from operations less capital expenditures) has been nearly $250 million, or 4.4% of the company’s market capitalization. When combined with the 15% expected growth in earnings over the next three to five years, the risk premium looks attractive. The free cash flow could also provide support to the valuation levels.

Though I’m not a technical analyst by trade, I also take comfort in the fact that it looks like DaVita stock may have bottomed in March, and that there is nearer-term support at the 50-day and 200-day moving averages — both of which are in the $52-$53 range. Those could be good spots for an initial trading stop or protective put options in case things go wrong.
Disclosure: At time of publication William Trent has no financial position in the companies mentioned in this article.

My latest column is up at RealMoney.

Omnicare (OCR) provides pharmaceuticals and pharmacy services to a variety of health care providers. It also offers contract research services to drug manufacturers. Earnings have been a bit rocky, but free-cash-flow yield and other valuation metrics make this stock worth a checkup.

The company’s primary competitor is PharMerica (PMC) , and it lists its peers as AmerisourceBergen (ABC) , Parexel (PRXL) , Pharmaceutical Product Development (PPDI) , PSS World Medical (PSSI) , and Sunrise Senior Living (SRZ) . There is also some competitive overlap with retail pharmacy companies such as Walgreens (WAG) and CVS Caremark (CVS) .

The long-term care industry is poised to benefit from aging boomers. However, investors won’t need to wait to reap the benefits. As I’ve pointed out recently, health care facilities are one of the few areas of the economy seeing employment growth. Presumably, they aren’t hiring for the sake of hiring.

Omnicare is trading at a reasonable multiple of 15 times this year’s earnings estimates. Given that the company has hit a speed bump, that doesn’t seem particularly cheap, but the stock begins to look enticing when you look at measures beyond earnings.

Even after deducting cash paid for acquisitions, however, the $280 million in free cash flow offers a healthy 8.75% yield.

Omnicare is currently trading below book value, which seems silly given that the industry average price-to-book multiple is above 2.0. Meanwhile, analysts expect the company to grow approximately 15% annually over the next five years. That estimate is in line with the company’s sustainable growth rate based on fundamentals.

Even if the company only grows at the 10% level forecast by the most pessimistic sell-side analyst, the low valuation could boost total returns to 20% or more annually if the price-to-book multiple converges with the industry average.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

My latest column is up at RealMoney.

We can all agree that the jobs report was pretty lousy. On a year-over-year basis, the growth in employment is barely staying positive.

However, as Jim Cramer likes to point out, there’s always a bull market somewhere, and regular readers probably know I like to use the economic reports as a source of stock ideas. Until they launch an “Economy ETF” (believe me, it won’t be long before somebody tries), that means sifting through the reports to find the industries and companies that are most poised to benefit from the prevailing trends. In this morning’s jobs report, that was pretty easy. According to the Bureau of Labor Statistics report, only five industries are showing statistically significant job growth:

• Hospitals
• Ambulatory health care services
• Nursing and residential care facilities
• Oil and gas extraction
• Pipeline transportation

I’ll bet you noticed the same pattern in those industries that I did.Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

My latest column is up at RealMoney.

I dissect the jobs report to see which industries are showing the best/worst growth in new hiring, on the thesis that companies in these industries may present investment opportunities.

The fastest growing industries are restaurants, hospitals, mine services, machinery, and oil & gas extraction. The worst were transportation equipment and a plethora of housing-related sectors.

Disclosure: At time of publication, William Trent owns shares of Starbucks (SBUX).

Disclosure: Author is long Starbucks (SBUX) at time of publication.

Large Cap Watch List (Track at Marketocracy) member DaVita Inc. (DVA), announced results for the quarter ended June 30, 2007. Excluding the valuation gain on the Company’s Product Supply Agreement with Gambro Renal Products, and excluding after-tax gains on the sale of investment securities the company earned $0.83 per share, well ahead of analyst estimates. The company also raised guidance for the remainder of the year:

We are revising our 2007 operating income guidance: operating income is now expected to be in the $790-$820 million range. Our previous guidance was for operating income to be in the range of $740-$780 million.

Unfortunately, the company now expects next year to be flat.

Our operating income guidance for 2008, excluding the impact of any potential Medicare legislation, is projected to be in the range of $790-$850 million. We are entering into a period of unusual earnings uncertainty. Therefore the guidance range for 2008 does not capture as high a percentage of the potential outcomes as usual.

Analysts were expecting a double-digit gain in 2008 earnings per share.

Looking at the cash flow statement, I also have some earnings quality concerns. Cash from operations was down despite an increase in net income. Changes in working capital, particularly squishy “other” asset and liability accounts, were the primary reason for the difference. Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Second Edition cites large changes in other assets and liabilities as a warning sign.

Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Laboratory Corporation of America(R) Holdings (LH) announced results for the quarter and six months ended June 30, 2007. Excluding restructuring and other special charges recorded in 2007, net earnings increased 14.1% to $132.8 million. Earnings per diluted share (EPS) increased 20.7% to $1.05, compared to $0.87 per diluted share in the second quarter of 2006. Excluding restructuring and other special charges recorded in 2007, EPS increased 25.3% to $1.09, in line with consensus estimates.

Revenues for the quarter were $1,043.1 million, an increase of 15.4% compared to the same period in 2006 and ahead of the $1.03 billion consensus. Looking ahead, the Company expects revenue growth of 13% to 14%, EBITDA margins of approximately 26.4% to 26.9%, and diluted earnings per share of between $4.11 and $4.27. With the consensus at 13.5% revenue growth and $4.21 in earnings per share, the apparent margin pressure (relative to expectations) is forecast to continue.

The Economic Calendar is quiet in the early part of this week but there are important reports at the end of the week. On Thursday is the Durable Goods report, for which the consensus estimates a 2.0% increase. On Friday is the Preliminary Estimate of 2Q GDP, which the consensus has pegged at 3.2%. That sounds a little high to me based on the economic data table I’ve been compiling.

EconomicData

The Earnings Calendar is as busy as it can get. Some of the names I’ll be watching:

Monday

• Altera (ALTR) - Xilinx (XLNX)  filed an awful report. Can Altera do any better? Consensus is $0.19 EPS on sales of $314 million.
• Hexcel (HXL) - This Small Cap Watch List (Track at Marketocracy) member was seeing rising estimates until last month, when they were cut from $0.20 to the current $0.17.
• Steel Dynamics (STLD - Annual Report) - The Mid Cap Watch List (Track at Marketocracy) member is expected to earn $1.04 on sales of $948 million.
• Texas Instruments (TXN - Annual Report) - expected to earn $0.42 on $3.45 billion in sales.

Tuesday

• CH Robinson (CHRW - Annual Report) - estimates have been rising and now stand at $0.47, but Landstar (LSTR - Annual Report) disappointed.
• CDW Corporation (CDWC) - stellar monthly sales reports have kept estimates rising. They now stand at $0.97.
• EMC Corporation (EMC - Annual Report) - The big news is still the VMWare IPO, but it is also a decent look at enterprise tech spend.
• Laboratory Corporation of America (LH) - The Mid Cap and Large Cap Watch List (Track at Marketocracy) member has been seeing positive earnings revisions and is now expected to earn $1.09 on $1.03 billion in revenue.
• Lexmark (LXK) preannounced and will probably offer poor guidance.
• Linear Technology (LLTC) - expected to earn $0.35 on $267 million in sales.
• Norsk Hydro (NHY) - The Large Cap Watch List (Track at Marketocracy) member has no analyst coverage right now.
• Plantronics (PLT) - my covered call position is now being cashed out so I’ve no skin in this one. But it is often volatile.
• United Parcel Services (UPS) is a great read on the health of the economy. Expectations are $1.03 on $12.23 billion in revenue.

Wednesday

• Arkansas Best (ABFS) - after Landstar’s (LSTR - Annual Report) weak quarter I’m expecting a poor showing. Estimates have come down to $0.67, but may not have come down enough.
• Colgate Palmolive (CL) - Large Cap Watch List (Track at Marketocracy) member unlikely to surprise much. Consensus is $0.83 on $3.31 billion.
• Corning (GLW - Annual Report) - is LCD supply/demand back in balance?
• Freeport McMoRan Copper & Gold (FCX - Annual Report) -Another Large Cap Watch List (Track at Marketocracy) member with dramatic positive earnings revisions, now standing at $2.71.
• Graco (GGG) is another Large Cap Watch List (Track at Marketocracy) member. Estimates have been coming down and are now at $0.61.
• MEMC Electronic Materials (WFR) - Is polysilicon supply catching up to demand for this Large Cap Watch List (Track at Marketocracy) member?
• Xerox (XRX) - can they make the numbers without asking investors to ignore a bunch of stuff? I don’t doubt they will earn $0.27 as expected but wonder how they’ll get there.

Thursday

• Federated Investors (FII) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.54.
• Ingram Micro (IM) is on the Small Cap Watch List (Track at Marketocracy) and expected to earn $0.36.
• KLA-Tencor (KLAC) - I know the semiconductor equipment fundamentals stink. I want to know how much and whether it is priced in.
• NII Holdings (NIHD) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.49.
• Western Digital (WDC) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.36.

Disclosure: William Trent has a long position in SMH.

Apria Healthcare (AHG) reported earnings:

For the quarter ended March 31, 2007, revenues were $389.3 million, which represents a 5.8% increase compared to revenues of $368.1 million in the first quarter of 2006. First quarter 2007 net income was $19.1 million, an increase of 18.7% from $16.1 million in the first quarter of 2006. Current quarter diluted earnings per share were $0.44 compared to $0.38 diluted earnings per share, a 15.8% increase over the comparable prior year period.

Analysts were expecting $0.43 on $392 million in sales. According to the company:

The provision for doubtful accounts as a percentage of net revenue was 2.5%, compared to 2.8% in the comparable period last year. Days sales outstanding (DSO) were 49 days at March 31, 2007, down from 56 days at March 31, 2006. This improvement is a direct result of increased cash collections resulting from initiatives to optimize billing processes and to increase patient co-payments.

As we have noted before, the provision for doubtful accounts is an area many investors monitor for potential earnings management. Taking a lower provision increases earnings in the current period, while taking a higher one may indicate that the previous quarters were under-reserved.

In Apria’s case, if Apria had reserved 2.8% of sales, as they did last year, the earnings would only have met rather than exceeded estimates. It is worth noting, but would be even more noteworthy if the reserve had meant the difference between meeting and missing the target. Apria certainly doesn’t bury the fact that the reserve made a contribution, saying:

“The incremental improvements in bad debt expense and DSO are particularly notable because these metrics are traditionally higher in the first quarter due to a significant industry-wide volume of payor changes and deductibles.”

Indeed, for many companies the provision is determined by evaluating receivables according to age and other factors that could indicate non-recoverability, and improvement in those factors really does mean improving operations for the firm. So given that Apria is being open about the contribution and that it didn’t help the company avoid missing estimates, we’re inclined to give them the benefit of the doubt for now.

As with any tool, simply monitoring bad debt provisions can lead to misleading results if not used properly.

Large Cap Watch List (Track at Marketocracy) member DaVita (DVA) reported earnings:

DaVita Inc. (DVA), today announced results for the quarter ended March 31, 2007. Net income for the three months ended March 31, 2007 was $76.6 million, or $0.72 per share, as compared with $57.5 million, or $0.55 per share, for the same period of 2006.

Analysts were expecting the company to earn $0.72. Although the numbers for the quarter were spot-on, the company raised its operating income guidance for the full year.

We are revising our 2007 operating income guidance: Operating income is now projected to be in the range of $740-$780 million. Our previous guidance was for operating income to be in the range of $700-$760 million. Operating cash flow for 2007 is currently projected to be in the range of $460-$510 million.

As a general rule, we don’t like it when companies issue guidance that you have to figure out. Why guide operating income when the reporting is primarily in net? In this case, when we extrapolate out the current non-operating items we get a $2.82 number, while the analyst consensus is at $3.12. Were the non-operating expenses (interest cost) higher than normal in the first quarter? Will there be higher expected non-operating income for the full year? Are analysts consensus figures incorporating some sort of pro-forma “operating income” based earnings per share? Or were the analyst estimates just too high?

It sounds like the company will have a lot of explaining to do on the conference call.