LifePoint Hospitals (NASDAQ: LPNT ) will be releasing its fourth quarter earnings report on Friday, Feb. 14. The hospital operator's shares currently trade at 16 times 2014 earnings, a bit pricier than its competitors Community Health Systems (NYSE: CYH ) and HCA Holdings (NYSE: HCA ) , which both trade at 11 times future earnings. However, LifePoint has better growth prospects with a five-year PEG ratio of 2.08, and it is working toward positioning its hospitals to take advantage of the changing health care services sector. I'll discuss below three factors long-term investors should consider when the company discusses its fourth quarter earnings on Friday.
1. Strategic acquisitions and market share
LifePoint has been very busy acquiring smaller competitors with the goal of increasing its position in faster growing markets. Acquisitions, so far, have had a positive impact on revenues. During 2011 and 2012, the company completed four transactions with Duke LifePoint Healthcare, which generated about $500 million in revenue.
In 2013, it entered into joint ventures with Fauquier Health and Portage Health; Bell Hospital was also acquired last year. LifePoint is expecting to close another four transactions with Duke LifePoint Healthcare, LifePoint's medical collaboration with Duke University, during the first and second quarter of 2014. One of these transactions – the formation of a joint venture with North Carolina provider Wilson Medical Center – has a signed agreement that is currently under review
Investors should expect LifePoint's M&A activity to continue and to be financed with free cash flow and the issuance of new debt. In January, the company increased a recent offering of $500 million in senior notes to $700 million. In its third quarter conference call, LifePoint stated its acquisitions should generate about $110 million in revenue for the fourth quarter. These mergers have helped the company revenue-wise – LifePoint has year-over-year quarterly revenue growth of 10% and is closer to the industry's 13% growth rate than its peers. However, long-term investors are urged to watch how the company's cash flows and debt levels change over the next few quarters.
While LifePoint has been gobbling up small competitors, the same can be said for its rival Community Health Systems. For Community Health, its long-awaited acquisition of Health Management Associates, or HMA, and its 71 hospitals was completed on Jan. 27. Forecasts predict that the acquisition will generate about $250 million in synergies during the first two years after the transaction closes
2. Admissions growth and service expansion
As the economy improves at a slower than expected pace, fewer patients have sought medical care. This has led to lower inpatient admission volumes at many hospitals. The hospital sector as a whole is seeing a shift to more outpatient services. When fourth quarter results for fiscal 2013 are announced, it will be interesting to see how LifePoint's admission rates have changed. During fiscal 2012's fourth quarter, admissions dropped on a same hospital basis by 2.1%. The hospital's inpatient surgeries dropped 7.1%, while outpatient surgeries fell by a much lower 1.6 .
The hospital operator's Duke LifePoint Healthcare business adds an extensive array of clinical services and systems to LifePoint's operations. LifePoint stated during a recent health conference that part of its growth strategy is to attract patients by expanding services related to cardiology, oncology, surgery, and imaging.
Its important to note that larger players within this group, such as HCA Holdings, may thwart LifePoint's strategy to attract patients. HCA is also deepening its core services and increasing its number of access points. Part of the company's growth strategy is to renovate existing facilities and to open new ones, such as free-standing emergency departments, ambulatory surgical centers, and urgent care centers. After investing $5.2 billion from 2011 to 2013, HCA is planning to spend an additional $2 billion during 2014
3. Improvements to operations
LifePoint has also been investing in operational enhancements that improve efficiency at its hospitals. By partnering with Parallon, a leading provider of shared services, the hospital has been able to improve its purchasing, accounts payable, and revenue cycle functions. With greater efficiency, the company is better able to manage its costs and capture revenues over the long term.
In 2013, the company estimated that the changes implemented improved EBITDA by $7 million to $10 million . During fiscal 2013's third quarter, LifePoint reported an adjusted EBITDA increase of 25% to $134 million. It will be interesting to see whether these enhancements have affected LifePoint's doubtful accounts, which stood at about 18% of 2013 third quarter revenues, an increase of about 1% from 2012.
These improvements enhance the delivery of patient care and also make the company more competitive. Rival Community Health Systems has also invested in operational improvements to the tune of $769 million during 2012. These improvements included enhancements to facilities and addition of new technology and clinical systems
My Foolish conclusion
Thomson Financial analysts predict that LifePoint's average fourth quarter revenue will come in at about $952 million, which reflects sale growth of almost 7% from 2012. Fourth quarter EPS is estimated at $0.80, an increase of almost 4% compared to 2012. LifePoint Hospitals is doing a lot to keep its hospitals profitable and its stock stands out with better long-term growth prospects than other hospital operators.
Picks for Sky High Stock Returns
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.