Sun Healthcare Group's profits soar
Barron's Online recently discussed Sun Healthcare Group's stock prices, and future expected profits. The company gets three-fourths of its revenues from Medicare and Medicaid. Though up since late March, the stock is 54% off the record high from January 2008. Barron's argues that investors underestimate Sun's prospects for expanding profits next year especially with a record-low price-to-earnings multiple that's well below the broader industry.
In August, the federal government will set Medicare rates for 2010. Though officials have proposed a 1.2% cut, rates should remain flat, or rise slightly, boosting Sun's profits beyond what's expected next year. Meanwhile, Sun remains focused on improving profitability by reducing its dependence on Medicaid, which covers two-thirds of the nation's nursing-home patients. (Medicaid pays for custodial or long-term care for poor seniors who are too frail and sick to live alone. It's Sun's single largest revenue source.) Sun and other operators want more patients coming off hospital stays, and are thus eligible for Medicare or private-insurance benefits that doll out far bigger payments. Last quarter, Medicaid generated 43.7% of Sun's in-patient revenues, down from 45% the previous year. Medicare's contribution rose to 33.2% from 31.7%. Private insurers made 6.3% of Sun's revenues, up from 5.5% last year, while private-paying patients fell below 16%, thanks to a weak economy.
Founded in 1989, Sun has survived bankruptcy and grown into the fifth-largest player in the $99 billion nursing-home industry. The vast majority of the company's revenues come from 185 nursing homes that provide short- and long-term skilled nursing care. This year, profits are expected to grow 23% to $1.14 a share, and climb another 8% in 2010, according to Thomson Reuters.
Thankfully, Sun has plenty of cash -- almost $100 million as of March 31. Meanwhile, the company sees free cash flow rising as much as 17% this year to $53 million. And Oppenheimer's Wiederhorn expects almost 57% of revenues next year to come from Medicare, private-pay and privately insured patients.
