Sickly Prices for a Changing Comprehensive Care

The word on Wall Street was that a major deal was in the works at Irvine-based Comprehensive Care, the nation’s largest provider of alcohol and drug abuse treatment programs.

It was supposed to be something that would cause the company’s stock price to soar. “Something like a takeover or a leveraged buyout,” according to Seth Shaw, a health care analyst at Prudential-Bache Securities in New York.

Speculators bid up the company’s stock in anticipation of the big announcement. During the five trading days ended Nov. 13, the stock jumped from $8.625 per share to finish the week at $10.625 in over-the-counter trading.

But when Comprehensive Care revealed Nov. 16 that it plans to restructure into two companies by splitting part of its operations into a second publicly traded company called CareUnit, the stock hit the skids.

Comprehensive Care fell back to $8.75 on the day the announcement was made. The stock has continued to slip, closing at $7.375 per share Friday. Comprehensive Care has been a poor market performer since 1985, when the company’s earnings peaked and the stock sold for up to $25.625 per share.

Although the restructuring program was a big step for the company, many shareholders had apparently been hoping for more.

Under the proposal, CareUnit will provide contract services to community hospitals and will operate a recently announced franchise program. Comprehensive Care will continue to run 26 company-owned behavioral treatment hospitals across the country.

Common stock in the new CareUnit company will be issued to Comprehensive Care’s existing shareholders.

Comprehensive Care Chairman B. Lee Karns said the restructuring is intended to boost Comprehensive Care’s earnings and the combined value of the two companies’ common stock.

Analysts said the company apparently believes that after the restructuring, the sum of its parts will be valued higher than the once-whole company. But “in this market, I’m not so sure about that,” said Steven B. Reid, a health-care analyst at Wedbush, Noble, Cooke, a Los Angeles brokerage firm.

Although Comprehensive Care said the split will allow each company to have its own management style and will result in lower operating costs and a reduced work force, several analysts said they doubt that it will have a significant effect on their combined earnings.

One industry source suggested that the company might be splitting up so it can get out of hospital operations. The cost of building 14 hospitals in the last five years has increased Comprehensive Care’s debt.

The company hasn’t announced plans to sell its hospitals, and spokesman Ken Estes declined to comment on the speculation.

Some analysts had no ready explanation for the restructuring.

“It escapes me. I don’t know why they’re doing it,” said Larry Rader, a health-care analyst at Merrill Lynch Pierce Fenner & Smith, a New York brokerage firm. Rader said the announcement has caused him to lower his opinion of the firm.

Several analysts said they believe Comprehensive Care should be doing more to address changing trends in the health industry.

Shorter patient stays and declining profit margins have cut into Comprehensive Care’s growth. While some large hospital companies have abandoned the alcohol and drug rehabilitation business, Comprehensive Care has failed to increase its market share significantly, analysts said.

In 1985, the company earned $17.2 million on revenues of $158.5 million. But by fiscal 1987, which ended May 30, earnings had dipped to $12.1 million even though revenues had increased to $194.9 million.

For fiscal 1988, Rader expects the company to earn from $12 million to $12.8 million, or 95 cents to $1 per share. Revenues are expected to be unchanged from last year.

Despite the market’s apparent disappointment with the restructuring, Rader said he is advising clients that “it’s OK” to buy Comprehensive Care stock at current prices. He said he still believes the company will be running a successful business over the long term.

Reid, however, said he considered the stock “dead in the water” for the rest of the year and predicted that it could fall victim to tax-motivated selling at year end.