FHP Has Come Out of HMO Wars in Good Condition

FHP International, a Fountain Valley health maintenance organization that offers a broad line of coverage options and benefits to attract new members, might do well to start peddling stock-ownership plans on the side.

After two years of rough-and-tumble fighting between HMOs and traditional health insurers, such strong health maintenance organizations as FHP are coming out on top. Attrition has reduced competition, and rates--stagnant for the past two years--are going up.

Health-care analyst Thomas Cope at Dillon, Read & Co. in New York calls 1988 the year of the well-positioned HMO, and Wall Street is taking notice. FHP shareholders who have owned their stock since the first of the year have realized a 65% increase in value.

FHP stock closed Friday at its 1988 high of $10.50 per share, up 62.5 cents for the week in over-the-counter trading. The stock traded as low as $6 per share in January.

“Health providers were beating each other up for years,” said Larry Selwitz, a health care analyst at Bateman Eichler, Hill Richards, a Los Angeles-based brokerage.

“Now the strong ones are making money again,” Selwitz said.

After reporting a net loss of $1.8 million on revenues of $97.7 million for the fiscal 1977 fourth quarter, which ended June 30, 1987, FHP has been solidly in the black.

For the first six months of the company’s 1988 fiscal year, earnings were $6.2 million on revenues of $222.6 million.

And analysts expect earnings for all of fiscal 1988 to top 1987’s $6.9 million.

Cope expects fiscal 1988 earnings of $1.25 per share, or $12.5 million. Peter Grua, a health-care analyst at the Baltimore brokerage firm of Alex, Brown & Sons, expects FHP to earn $1.15 per share for the current fiscal year and $1.43 per share for fiscal 1989.

Analysts say that health insurance companies are expected to raise rates by as much as 30% in some markets this year and that FHP might be able to increase its rates more than 10%.

From 1985 to 1987, large insurance companies offered low rates in order to penetrate the prepaid health-care business dominated by HMOs. Rates remained flat, and Wall Street was down on HMOs.

With insurance companies raising rates since the end of last year and poorly positioned HMOs scaling back operations or shutting down altogether, such well-positioned HMOs as FHP are expected to continue doing well.

Cope said FHP is in good shape because about 50% of its members are enrolled in lucrative staff-model HMOs, which provide care in facilities owned by FHP and staffed with its own doctors and nurses. Many HMOs contract with other health-care providers.

FHP also has done well by increasing the number of members who also receive Medicare payments. For those members, FHP receives both the government’s partial payment for treatment and the members’ monthly fees.

In addition to improved operations, FHP has attracted investor interest because the company last month won another round in a continuing legal battle with the state attorney general’s office.

A judge ruled in March that the attorney general does not have jurisdiction to require FHP to pay $80 million to charity. The attorney general filed suit in 1986, complaining that FHP was grossly undervalued when managers bought the then-nonprofit HMO for $38.6 million.

The attorney general’s office said it plans to appeal the case.

But Selwitz said that even if FHP ultimately loses, the firm is strong enough to survive.

Shareholders of J. M. Peters Co. remain in the dark about a botched deal involving the planned sale of 87% of the Newport Beach home builder.

On March 30, a plan by MDC Holdings to pay $100 million for Southmark Corp.’s 87% stake in Peters fell through in the final hours of negotiations. The remaining 13% of Peters’ shares are publicly traded.

Neither Denver-based MDC nor Southmark has discussed the reason for the deal’s failure. And Southmark, a large financial services company in Dallas, hasn’t discussed its plans for Peters.

Southmark, which is trying to find cash to pay off a $2.6 billion debt, has said that everything--including its office furniture--is potentially for sale if the price is right. But real estate analysts said the company might hold onto Peters.

Southmark may have realized the true value of Peters, said Barbara Allen, a home-building analyst at Prudential-Bache Securities in New York.

Southmark knew Peters had become worth more than the $21 million it paid James Peters for the firm in 1985. But it didn’t know how much more.

For instance, Southmark twice scaled back last year’s public stock offering because of investor indifference.

After MDC’s February offer to acquire Peters, “Southmark is probably seeing that Peters is quite a company,” Allen said.

In a research report last month, Allen said Peters stock could climb to $15 a share over the next year, far above MDC’s offer, which was valued at about $8 per share.

Peters stock closed Friday at $8.125 per share, up 12.5 cents for the week and well above the stock’s 1988 low of $4.375 per share.

Because Peters has reported earnings increases since MDC made its offer in February, Southmark has even more reason to like the company.

Peters reported a sixfold earnings increase for its fiscal 1988 fourth quarter, which ended Feb. 29. Net income for the period was $15.1 million, contrasted with $2.4 million a year earlier.

Allen said Southmark might do well to issue more Peters stock to the public.

“I know I’d like that. It’d give a lot more float to the company,” Allen said, referring to the relatively few shares of Peters currently outstanding. A small “float” makes a stock more volatile because the purchase or sale of large blocks of stock can cause the price to swing.

Shares of AST Research Inc., an Irvine-based computer maker, rose sharply last week following better-than-expected earnings news Thursday.

AST stock gained 75 cents Thursday and another $2 Friday to close at $13.125 per share, an increase for the week of $3.125, or 31%. AST is now up 78% from its 1988 opening price of $7.375.

The company said Thursday it expects fiscal third-quarter earnings to be up 38% to $4.7 million, contrasted with $3.4 million in the year-earlier period. AST also said revenues for the quarter, which ended March 30, are expected to be up 90% to about $105 million from $55.4 million.

“I was expecting good numbers, but these obviously were a surprise,” said Blake Childs, a technology industry analyst at Bateman Eichler. Even with the stock run-up, AST shares are still attractive, Childs said.

“The next quarter looks equally as good. The company might surprise us all again.”