A Shining EchoStar

With or without a Hughes Elecrtronics deal, enthusiasts say the satellite-TV company is a gem. Also featured: Doral Financial and RehabCare Group

By Mara Der Hovanesian

Last October, Inside Wall Street reported that EchoStar Communications (DISH ) might surface as a suitor for Hughes Electronics' DirecTV (GMH ), the nation's largest satellite-television broadcaster, now owned by General Motors. Indeed, EchoStar, the No. 2 player in satellite-to-home services, came through on Aug. 5 with a stock-swap offer valued at about $30 billion. "The synergies that would come from this combination are the best you can get," says analyst Vijay Jayant of Morgan Stanley, who pegs EchoStar at 50. It currently trades at 28.

With or without Hughes, EchoStar enthusiasts say it's a gem. Sure, the two companies combined would have 16 million subscribers and go head-to-head with the nation's top cable operators--if, that is, EchoStar's bid beats out a competing offer by Rupert Murdoch's News Corp. (NWS ) and then gets the nod from regulators. But EchoStar is already adding subscribers faster than its rivals. In the second quarter, it surprised analysts by reporting first-ever operating profits of $64 million, plus a net profit of $2 million. Deryck Lampe, portfolio manager of Stein Roe & Farnam, says the Littleton (Colo.) outfit will generate $380 million in cash flow this year and will top $2.5 billion by 2004. "What is truly impressive is the very limited investment required to generate this level of growth," says Lampe, who first bought the stock in February and now has 3 million shares, purchased at an average cost of 27. He expects the stock to be "north of 50" by this time next year.

Doral: To New York from Puerto Rico

Doral Financial (DORL ), Puerto Rico's largest mortgage originator, knows how to talk the talk--in Spanish. Doral, which does 50% of the island's home financing, is expanding on the mainland, angling for a bigger slice of the Hispanic market. Its New York-based thrift, Doral Bank FSB, has just opened a second office, in Washington Heights, and has plans for one in Astoria. The branches are targeting New York's huge Puerto Rican community. They'll have bilingual reps and extended weekend hours to accommodate working families. "The Hispanic market is underserved by city banks, and there's some distrust in the community," says Mark Alpert of Deutsche Bank Alex. Brown. "But given Doral's brand recognition, they may be able to crack the market here."

Doral, which also operates 27 commercial banking offices in Puerto Rico and one in Miami, has enjoyed three decades of consistent profitability, low credit risk, and enormous competitive advantages, says Alpert. Its stock has already surged 60% so far this year, hitting a 52-week high on Aug. 14. But Albert, whose firm oversaw a secondary offering in July of 4.4 million shares at $32.50 each, says it has more room to run. His target is 45. "It's still undervalued," he says, noting that Doral's return on equity is 23%, vs. 14.9% for most banks. In July, Gary Gordon of UBS Warburg raised his price target and earnings estimates for Doral. He estimates 2001 earnings per share will be $2.60, compared with First Call Consensus estimates of $2.58. His 2002 estimate of $3.20 also beats the consensus figure of $3.07.

RehabCare Is Set for a Booster Shot

Hospitals and nursing homes are coming up empty-handed in their search for good help. The nursing shortage--expected to become more acute as the population ages--has boosted business for RehabCare Group (RHB ), a national provider of temporary health-care staff. The St. Louis company has grown through "deft acquisitions" in 1998 and 1999, according to J.P. Morgan Chase's Matthew Ripperger. He started covering RehabCare on Aug. 2, with a "long-term buy" rating and a 57 price target. The stock now trades at 40.

A revamped system for Medicare reimbursements next year could provide a new catalyst for growth. The new system will cap reimbursements to hospitals and nursing homes, putting a squeeze on facilities to cut costs. RehabCare's in-patient and out-patient program management division stands to gain.

Still, Wall Street has been hard on the stock, which is down 23% so far this year: While the company reported a 41% rise in second-quarter profits, or 43 cents per share, over the past year, it warned on July 31 that future 2001 earnings will be at the low end of consensus estimates. The stock fell 12% that day, just two weeks after hitting a 52-week peak. Judith Scott of investment firm Robert W. Baird, however, reiterated her "strong buy" rating and says the pullback is a buying opportunity. Her target is 53.

Gene Marcial is on vacation

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