Improving results and a rebound from a potentially devastating lawsuit are driving gains for Foothill Ranch-based Skilled Healthcare Group Inc.
Shares of the nursing home operator are up more than 300% since early July, when Skilled’s stock tanked after the company was hit with a $677 million jury verdict in a class-action lawsuit.
Skilled, which had a market value of about $250 million last week, struck a settlement of the suit in September for a fraction of the jury verdict.
The company also has reported two quarters of financial performance that exceeded Wall Street expectations.
“The way the stock has gone back up, performance is probably your best indicator,” Chief Executive Boyd Hendrickson said.
Skilled runs about 100 nursing homes and assisted living facilities in California and six other states.
It also provides rehabilitation therapy, hospice care and home healthcare.
Earlier this month, Skilled posted an adjusted third-quarter profit of $9.2 million, topping Wall Street’s estimate of $7.4 million.
Revenue rose 12% to $209 million.
Skilled saw gains from long-term patients at its nursing homes and from its home health and hospice units, said Michael Wiederhorn, an analyst with Oppenheimer & Co.
In May, Skilled bought nine hospice and home healthcare companies with operations in four states for an undisclosed price.
The acquired operations have yearly revenue of about $50 million, according to Skilled.
The company also upped its profit and revenue guidance for all of 2010.
Skilled now expects a yearly profit of $34 million to $35.9 million, up from an earlier forecast of $32.2 million to $34 million.
Revenue is seen coming in at $805 million to $812 million, up from an earlier projection of $795 million to $805 million.
Wall Street expects Skilled to post a 2010 profit of $35 million on revenue of $810 million.
“Time of Upheaval”
Making sure business operations didn’t deteriorate during Skilled’s “time of upheaval” after the jury verdict was critical, according to Hendrickson.
Skilled’s “operational people” focused on making sure that they gave “150% of their attention to our patients. That gave people a lot of comfort (that) our attention was not diverted,” he said.
It also allowed Hendrickson and Roland Rapp, Skilled’s executive vice president and general counsel, to work with outside lawyers on the lawsuit.
“Although the trial had gotten out of control, we felt at the outset that, fundamentally, the law and the compliance with the law were on our side,” Rapp said.
The suit was filed in 2006 and went to court a year ago. The suit alleged the company didn’t provide adequate staffing for patients at several of its California facilities from 2003 to 2009.
After the verdict the company sought a mistrial, contending a juror lied on a sworn questionnaire about connections to one of the plaintiffs and to one of Skilled’s defendant facilities.
Skilled felt it could have prevailed in the case on appeal, according to Rapp.
But the company wasn’t able to post a bond equal to 150% of the judgment—about $1 billion—to pursue an appeal.
Skilled went as far as to look at “the one available means of protecting the company, which was to prepare for a possible filing of Chapter 11,” Rapp said.
Fallout from the jury verdict in the case weighed heavily on Skilled during the summer.
The company’s shares lost 75% of their value on July 7, the day of the verdict.
“Whenever you have a negative like that overhanging, particularly in healthcare, people have a tendency to get a little gun-shy,” Hendrickson said.
The company’s shares shot up 25% in early September, after Skilled said it would pay $50 million to settle the case.
“Wall Street doesn’t like uncertainty, and there is massive uncertainty when you have a potentially bankrupting (verdict) out there,” said Robert Mains, an analyst with Morgan Keegan & Co., a Memphis, Tenn.-based investment bank. “Now, life can go forward and investors can focus on the things Skilled does well.”
Skilled’s shares still are off about 25% from their 2010 high in late May.
Improved Outlook
The company’s recent results and management’s positive tone on Medicare reimbursement have been the main drivers of the company’s stock rebound, according to Brian Williams of Nashville, Tenn.-based Avondale Partners LLC.
Skilled gets about 30% of its revenue from the federal Medicare program for seniors.
“Given the removed overhang from the (lawsuit), improved reimbursement visibility and continued strength from operations, our outlook on (Skilled) has improved,” Williams said in a research note.
