Doctors holding or thinking about accepting stock from a physician practice management company in exchange for their practices learned March 6 that, on Wall Street, good news isn't always what it seems. March 6 was the day the stock market punished FPA Medical Management for making money.
The San Diego-based PPM, the nation's third largest in terms of doctors and revenue, put out a 1997 year-end earnings report that was in line with analyst expectations. The company reported profits of $25.9 million, or 61 cents per share, on revenue of $1.2 billion, compared to a $26.1 million loss, or 80 cents per share, on revenue of $678 million in 1996. The figures exclude costs associated with acquisitions.
FPA expected to be greeted with a higher stock price for its performance. The company released its earnings report at the beginning of the trading day; companies hoping to limit the impact of bad news tend to release earnings reports after the trading day ends.
And sure enough, FPA's stock price began to go up, heading past $24 a share by lunchtime. But at about 1: 30 p.m., Salomon Smith Barney analyst Geoffrey Harris single-handedly cratered the stock by questioning FPA's "quality of earnings."
Harris said FPA's balance sheet was deteriorating. FPA, he said, had a negative $38 million in cash flow at the end of 1997, including $17 million set aside for acquisition expenses and $30 million in working capital requirements. Moreover, Harris noted an increased reliance on capitation revenue, meaning the company will have to set aside more money for cash reserves, thereby cutting into profits.
The fourth quarter of 1997 was the second straight quarter in which Harris had reacted by downgrading FPA's stock. Harris, whom an assistant says prefers to avoid talking to reporters, didn't comment for this story.
The market reaction to Harris' report was swift and sure. In the first hour after it appeared, FPA's stock price sank from about $24 to $18 before recovering to finish at $18.75. Usually about 1 million FPA shares are traded daily; on March 6, 10.2 million shares changed hands.
At least three other analysts released glowing reports about FPA over the next few days, but since the MedPartners-PhyCor merger imploded on Jan. 7, bad news has traveled faster than good in the PPM market. FPA's stock hasn't reached even $20 since the March 6 decline.
FPA understands that investors are not exactly bullish on PPMs. When MedPartners, in conjunction with the failed PhyCor merger, reported it would have to take at least $145 million in unexpected charges against fourth-quarter earnings because of higher than expected costs, FPA released a statement pointing out the differences between its capitation plan and the apparently troubled plan of MedPartners to ensure investors didn't punish it, too. FPA's stock also took hits when affiliated HMOs reported financial trouble, although the declines usually were small.
Though the fervor for PPM stocks actually ended in mid-1996, the troubles at MedPartners cemented the idea among investors that the whole industry needed close scrutiny.
Stock prices of five multispecialty PPMs -- FPA, PhyCor, MedPartners, Complete Management and PhyMatrix -- are worth 20% less than they were in late October, when the PhyCor-MedPartners merger was announced, according to an index put together by Durham, N.C.-based investment banking firm Townsend Frew & Co.
"We've generally seen a guilt-by-association trend," FPA spokeswoman Angela Rivera says.
But FPA's performance should convince physicians that affiliating with the company is a good idea, she says. As long as they don't expect the stock they acquire for their practice to keep rising when some Wall Street analyst is feeling gloomy.