Foundation Health Picks Up Its Bed And Walks

The past nine months have brought a terrific recovery at Foundation Health, a provider of managed care to more than 3.4 million people. After losing a massive federal contract for Hawaii and California last July that had accounted for about 40% of its revenues, Foundation's stock plummeted from 35 to 18 in a matter of days. But Chairman and CEO Daniel Crowley pushed to broaden the company's nongovernment business of providing one-stop health-care shopping. Result: Profits have surged, and the stock has soared to 41.

With such a phenomenal rebound, has Foundation reached its peak? Not by a long shot, say some big investors who snapped up additional shares when the stock plunged. These include T. Rowe Price, which increased its stake to 10%, and Mutual Series Mutual Fund, now a 5% stakeholder.

In spite of the stock's bounce-back, the "valuation of Foundation remains compelling, and we are retaining our buy rating on the shares," says Margo L. Vignola, a health-care analyst at Salomon Brothers. She notes that Foundation's rapid internal growth, combined with its acquisitions of other companies, more than made up for the loss of its five-year, $3.5 billion contract for Civilian Health & Medical Programs for Uniformed Services.

PROGNOSIS GOOD. In a matter of days, the company is expected to announce the acquisition of a company that provides a 24-hour-a-day emergency service to care for job-related injuries. There are also whispers that Foundation will shortly sign a strategic alliance with a larger health-care corporation. On May 4, Foundation announced the signing of a two-year Medicaid contract to provide managed-care dental coverage in Hawaii.

Through its subsidiaries, Foundation offers group, individual, Medicare, and Medicaid HMO plans--including dental, eye, and prescription-drug services.

Foundation is still trading near the bottom of its peer group in terms of its price-earnings multiple. Its current p-e is 14 vs. a group average of 20.

Foundation surprised analysts when it announced the results for its fiscal third quarter ended Mar. 31. Earnings came in at 68 cents a share, up from expectations of 63 cents. Consequently, Vignola has raised her estimate for the year ending June 30, 1994, from $2.65 a share to $2.77. Her fiscal 1995 estimate is $3.10. Revenues are expected to rise to $1.8 billion in 1995, up from 1994's estimated $1.7 billion.

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