Boring Portfolio Report
Tuesday, July 9, 1996

by Greg Markus (MF Boring)

ANN ARBOR, MI (July 9) -- Healthcare stocks were hazardous to the Boring Portfolio's health today, as Prime Medical Services slipped $ 7/8 and Oxford Health Plans tumbled $4 1/2. Nice bounces by Borders Group and Green Tree Financial, continued strength in Cisco Systems, and one mother of a move by Shaw Group helped to cushion the blow, however. For the day, the Borefolio gained 0.36% in net asset value -- right between the S&P 500 (+0.34%) and the NASDAQ (+0.41%).

Let's get the good stuff out of the way first, so that we can focus on the sickies.

Other than the bucks I dropped at Borders in Chicagoland over the long week-end, I have no idea why BGP shares advanced $1 1/4 on Tuesday. As for Green Tree, I attribute its good day to the combination of modestly easing interest rates and bargain hunters moving in prior to GNT's quarterly earnings report, which will occur prior to the market opening next Monday. A nice report from StrataCom last night presumably helped Cisco a bit today. CSCO advanced $ 3/4.

Check out Shaw Group! Not only did SHAW rise $1 5/8 (or over 8%), it did so on volume of 984,200 shares. That's over 10% of outstanding shares, folks. I note from today's First Call that all three analysts who follow SHAW hiked their FY96 projections: two to $0.95 and one to $0.94. Two of the three raised their FY97 projections, as well, moving the consensus from $1.38 to $1.42. All three analysts continue to rate the stock as a "strong buy," of which there was plenty occurring today.

Enough good news. What's ailing PMSI and OXHP? In part, both are suffering from a general malaise that has afflicted healthcare stocks recently, as various of the weaker companies telegraph poor earnings prospects. Today, it was Mid-Atlantic Medical's turn.

Mid-Atlantic Medical is an HMO that partially competes with Oxford. MME shares have been under pressure for some time now, and the company reported last night that shareholders should prepare themselves for a second-quarter loss of $0.05 to $0.10 a share, rather than the $0.20 per share profit that had been projected. Bear Stearns responded by downgrading the stock to sell, which is exactly what a lot of folks did.

PMSI will be offering its secondary any day now (Wednesday?), and so some traders may have taken today's weakness as an excuse to bail now and ask questions later. As for OXHP, it had the double misfortune of having Oppenheimer initiate coverage with a bleah "market performer" rating.

If you read the seven-page, single-spaced report that Oppy's Lori Price and Kathleen Baxley issued on Oxford, the message is hardly disastrous.

Start with the numbers. Price and Baxley forecast EPS of $1.16 for FY96 -- basically, right in line with the current consensus of $1.17 (with a range of $1.10 to $1.20). Their FY97 projection of $1.50 is below the consensus $1.63, but still well within the current $1.43 to $1.80 range. So even on the basis of Oppy's numbers, the forecast is for 30% EPS growth, FY96 to FY97. And the Oppy analysts estimate "the company's longer-term EPS growth rate" at "25-30%."

Uh, I could be wrong about this, but I don't expect the "market" to "perform" at anywhere near that clip. At any rate, if you plug this low-ball multiple of 30 onto the Oppenheimer FY96 forecast of $1.16, you end up right around $35. So even if one buys the Oppenheimer story, OXHP is "merely" a fully-valued stock that is projected to grow around 30% in the year ahead, and perhaps 25% to 30% long-term. I should be burdened with more such "market performers."

As for the reasoning behind their forecast (and it is an exceptionally well-stated case, even if I don't agree with it all), Price and Baxley's concern is (no surprise here) that OXHP will face increasing competition that will eventually force the company to cut prices.

Perhaps. But to date OXHP has experienced "astronomical enrollment growth" (the report's term, not mine) despite everything that competitors could throw at it -- and without dropping premiums. Oxford competes on value, not price. The vast majority of its customers enroll in Oxford's POS "Freedom Plan," a model that Oxford pioneered.

In a POS, you pay a bit more, but you get the option of selecting healthcare outside the network. (I personally moved myself and my family into a similar plan here in Michigan last year. Costs a bit more, but worth it.) Moreover, Oxford enjoys exceptionally good relationships with both its healthcare providers and its patients. In the most recent Federal HCFA survey, "the lowest complaint rate was posted by Oxford Health Plans, Inc." -- 0.28 complaints per 1,000 members, as compared with a national average of 1.29 complaints.

As I noted yesterday, the Feds have quietly shelved plans that would have limited HMO's profits arising from cost controls on services to Medicaid and Medicare patients. Nobody wants to rile the AARP during an election year. Since OXHP is enrolling Medicare customers at triple-digit growth rates, this development should also work to the company's advantage.

I spoke with the company a couple of weeks ago, and they reiterated that they were "still comfortable" with the consensus $0.27 for the quarter that just ended and $1.17 for the year. OXHP is slated to report on August 6, so we've got a few weeks to slog through yet.

I remain comfortable holding OXHP in the Borefolio. I believe that customers are willing to pay a little more to get a lot more. As the saying goes, if price was the only thing that mattered, we'd all be driving Yugos.

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Transmitted: 7/9/96