A TIMELY PLAY ON SENIOR CARE? Long-term care facilities look attractive Looming congressional cuts on Medicare and Medicaid have left investors wary of health-care stocks. But one area remains attractive to many market pros: long-term care companies. Careful stock pickers can find good buys, such as companies trading at a discount to current asset value or to future earnings growth. Nonetheless, the uncertainty surrounding Medicare's future, coupled with industry growth pains, has taken a toll on long-term care stocks' performance. In 1996, the Johnson Rice Long Term Care Index, a compilation of 17 stocks, had a 0.5% decline, while the Standard & Poor's 500-stock index soared 20.3%. But the future isn't likely to repeat long-term care companies' sorry past. That's because some companies are poised to benefit from current trends such as consolidation, the shift to nursing homes providing greater levels of care, and growth in the elderly population. The $90 billion nursing-home industry is growing at a rate of about 10% annually. And John Hindelong, health-care analyst at Donaldson, Lufkin & Jenrette Securities, predicts demand for long-term-care beds will rise steadily. To cut costs, hospitals and health maintenance organizations are shifting sub-acute care to nursing homes, which can treat patients more cheaply. BUYING BINGE. With U.S. nursing-home occupancy rates averaging about 90% and the elderly population mushrooming, it's likely more facilities will be needed. Construction, though, will probably happen slowly, due to widespread laws that restrict the development of new facilities. So home operators that establish market presences now through smart acquisitions will be well-positioned for future growth, says industry analyst Mark Banta. One example is Health Care & Retirement in Toledo, which operates in the heavily senior-populated states of Florida, Michigan, and Ohio. It bought 28 rehabilitation clinics in 1996 and plans to buy several more this year. Banta expects 17% earnings growth in 1997. Some long-term-care stocks, despite strong company management and fundamentals, are undervalued because of acquisition costs. Houston-based Living Centers of America is a case in point. It bought American Rehabilitation Services in Brentwood, Calif, in early 1996. In July, Living Centers posted a third-quarter shortfall of 13 cents per share as a result of operational inefficiencies attributed to the purchase. Still, Al White, a portfolio manager at Sirach Capital Management in Seattle, sees value in the stock because its $41 per-share asset value is substantially above the share price. Living Centers is trading at a price-earnings ratio of 11, below the industry average of 13. White expects earnings of $2.58 per share this year, up 21% from 1996. Assisted-living communities are the fastest-growing segment of the elder-care market. They offer private living quarters and help in personal care--good for seniors who are not ill enough for nursing homes but can't live alone, either. Kapson Senior Quarters, based in Woodbury, N.Y., provides daily home care as nursing homes increasingly focus on sicker patients. Kapson's 15 facilities are strategically located in the Northeast, where the greatest number of senior elderly, 80 and above, reside. Occupancy levels there are near 100%. Many assisted-living companies have gone public recently, so choose carefully. Unlike nursing homes, which often have a mix of private-pay as well as Medicare and Medicaid residents, assisted living facilities are virtually all private-pay. Select those with high occupancy and high-quality care. DLJ's Hindelong recommends Sunrise Assisted Living based in Fairfax, Va. Sunrise management chose its locations in the country's wealthiest zip code areas to ensure a steady flow of paying clients. Until Congress decides on reimbursement levels for Medicare and Medicaid patients, avoid long-term care companies such as Community Care of America and Advocat, which depend largely upon these programs' payments. Steer clear, too, of those facilities that outsource reimbursed services that are now under scrutiny by the government, such as rehabilitation therapy. Nursing homes frequently contract with outside providers for such health-care services, often at a profit, because the Medicare reimbursement more than covers the service cost. But that may change as Congress reconsiders current payment levels. So pick these stocks wisely, and you may have a good chance of making your portfolio healthier for your own retirement. ADVICE: Avoid long-term care companies that depend largely upon Medicare and Medicaid payments By Lisa Sanders EDITED BY TODDI GUTNER RELATED ITEMS TABLE: Healthy Issues Return to top of story

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