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Dental HMO Looks Good, Analyst Says

May 11, 1986|ROBERT HANLEY | Times Staff Writer

Sell stock when the news is good and buy when it is bad is a time-honored investment truism. One problem with that theory, of course, is that buying on bad news doesn't pay when rock bottom turns out to be a false floor.

While it's impossible to eliminate the risks that are involved in investing in a company whose recent stock history has been volatile, Safeguard Health Enterprises Inc. looks like a good buy at its current price, says Larry Selwitz, an analyst for the Los Angeles investment firm of Bateman Eichler, Hill Richards Inc.

The Anaheim prepaid dental care provider last month said first-quarter net earnings would be about half of last year's $762,000, largely because of unexpected high costs in opening 14 new dental offices. At the same time, the state Department of Corporations released a report critical of some dental offices used by Safeguard.

Consequently, Safeguard stock, which is traded over the counter, fell sharply from $11.50 a share on April 7 to $7.75 a share four days later. During that four-day trading binge, 1.3 million shares, or about 16% of Safeguard's public float, changed hands.

On Friday, the results were pretty much as Safeguard had predicted, with first-quarter net earnings of $367,000 down exactly 50% from last year. Safeguard closed Friday at $8.125 a share, down 12.5 cents for the week on 607,800 shares traded.

Still, the company's vital signs remain strong, Selwitz said.

Long-term debt is only $1.3 million contrasted with $25.5 million in equity. Moreover, Selwitz said, because it is a dental HMO and offers no hospitalization coverage, Safeguard is free of many of the risks associated with medical HMOs.

And because prepaid dental plans cover less than 5% of the population, rapidly expanding Safeguard--the largest dental HMO in the United States--is in a good position to capture a large share of the market.

For all of 1986, Safeguard's net earnings are expected to total 45 cents per share, or about $3.6 million, Selwitz projects. For 1987, he said, net earnings are likely to grow 33% to 60 cents per share, or about $4.8 million.

Though he recommends buying Safeguard at the current price, Selwitz told The Times that he still has a caveat or two for investors. In particular, he warns that the entrepreneurs who founded Safeguard may run into trouble managing the company's rapid growth.

"In order to really get the confidence of the street," Selwitz said, Safeguard must hire a good chief financial officer, as well as a manager to oversee its company-owned dental offices.

"The fact that it has such rapid growth potential puts up a red flag," he said. "When a company is on that kind of fast track, it has to demonstrate the ability to attract and retain good management." Selwitz said he believes that similar management situations exist in many segments of the health care industry.

An additional caution that Selwitz extends is that, in a general market slump, health stocks are likely to fall faster than other issues. But because many HMO stocks already are selling at steep discounts, as a group they "ought to outperform the rest of the market for the rest of 1986," he said.

Irvine-based El Torito Restaurants Inc. on Friday hit a high of $20.50 a share on the New York Stock Exchange on news that W.R. Grace & Co. had approved in principle a plan to sell controlling interest in its $1-billion restaurant group to a management team through a leveraged buy-out.

Under the buy-out scheme, El Torito, of which Grace owns 73%, would be merged into the restaurant group after the other El Torito shareholders are bought out for approximately $20 per share in cash. There are nearly 3.1 million shares outstanding not owned by W.R. Grace.

El Torito has been gaining in price since early April, when news of a possible buy-out first surfaced.

By the close of trading Friday, El Torito had slipped to $19 a share, up 25 cents for the day but down $1.50 from the mid-day high. Daily volume was 271,800 shares. For the week, El Torito was up $1.875 a share on volume of 415,000 shares.

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