A "Rehabilitated" Company

09/03/2004 12:00 am EST

Focus:

Lou Dobbs

Anchor and Managing Editor, CNN News

"I don’t specifically try to find turnaround stories in The Lou Dobbs Money Letter, but they can be some of your best investments," says Lou Dobbs. "But let me tell you about one such companyRehabCare, a healthcare staffing firm.

"Our goal is to focus on quality companies with sound business models that are run by talented, honest management teams. I believe RehabCare Group (RHB NYSE) is a company that has all of the characteristics of a long-term wealth-builder. A year or so ago, I would have avoided this stock. Since then, the new CEO and president has implemented several important initiatives to get the company—and the stock—back on track. Try as we might to fight it, somehow all of us baby boomers manage to keep getting older. And as the huge numbers of boomers age, firms that provide healthcare services are going to be increasingly important. Let me first tell you what RehabCare does, and then talk about the impressive turnaround we’ve seen so far.

"In short, RehabCare is one of the country’s leading providers of rehabilitation program and management services. It provides physical, occupational, and speech therapy services in acute care, skilled nursing, outpatient, and home health settings to more than 700 hospitals, nursing homes, and other long-term care facilities across the country. On July 18, 2001, RehabCare’s stock hit an all-time high of $52.99. Less than two weeks later, management warned that earnings for the remainder of that year would be at the low end of estimates. The stock fell 12% in one day, beginning what would be a two-year collapse. It reached a low of $13.48 on June 9, 2003. In the year since, it has climbed back up to the mid $20s.

"So what happened? In 2001, two pressures on the business came to a head. First, a big chunk of RehabCare’s business was its healthcare staffing services. The environment for those services was weakening. Second, there were fears that the government would reduce Medicare reimbursements, a substantial part of how RehabCare gets paid. Frankly, management didn’t respond well to these two challenges at the time. Today, the picture is quite different, as the new CEO and president, Dr. John Short, PhD, has strategically repositioned the company for profitability and growth. Costs have been cut; the staffing division was sold; and management believes all pending changes to Medicare rules can be quantified (sometimes government regulations are so complicated it takes time for companies to figure them out) and has strategies in place to minimize any resulting impact.

"In addition, RehabCare has done a better job of meeting customers’ needs. It now offers greater flexibility with both individual services and all-inclusive packages. Management is also exploring joint ventures in which both parties share in the risk and rewards, to attract customers. John deserves a lot of the credit for the significant changes made over the last year. No surprise, then, that the board elected him president and CEO on May 3rd. He’d been holding those titles on an interim basis for the past year, and as you can see, has already put the company on a successful track. The stock is up more than 40% over the last 12 months, and, I believe, has all of the characteristics to continue building wealth for long-term shareholders."

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