The hospital business has been “red hot” lately, Cramer said Wednesday, with many of the related stocks doubling and tripling since the early March lows. Select Medical Holdings, which holds its initial public offering on Thursday, “should be better than those.”
“Unlike a lot of IPOs,” Cramer said, “Select Med is a real company with real earnings. It’s a powerhouse in its industry.”
That industry is long-term specialty acute-care hospitals and outpatient rehab centers, and it’s a high-end business. Select Medical operates 92 hospitals for patients with serious medical conditions like respiratory failure, neuromuscular and cardiac disorders and severe trauma. Only one player, HealthSouth with 99 facilities, is bigger. The double bonus in this segment comes from not just the “expensive procedures that could be very lucrative,” Cramer said, but also its inherent protections against President Obama’s health-care reforms. The White House won’t be cutting treatments that keep people from dying.
Select Medical also runs 948 outpatient facilities in 37 states and Washington, D.C., where it provides physical, occupational and speech rehabilitation services. The company is number one in the industry, and the division has doubled in size since 2007, when Select Medical took over HealthSouth’s rehab business.
Cramer likes Select Medical because the large-scale operations allow for big cost reductions, mainly by centralizing the two divisions’ administrative functions. Also, inpatient rehab should be a “major opportunity going forward.” The company will create stand-alone inpatient rehab centers – they presently live inside acute-care hospitals – and build the outpatient facilities around them. A joint venture with Penn State Hershey Medical Center has already been completed, and Select Medical is looking for other large health-care centers and university hospitals with which to partner.
Medicare and Medicaid account for 66% and 10%, respectively, of Select Medical’s specialty care and rehab businesses. As for Obama-care, Cramer said that any damage done by reforms would be balanced out by the new patients who didn’t have insurance before.
Select Medical, which will trade under the ticker symbol SEM, plans to raise $400 million by offering 33.4 million shares at between $11 and $13 a share. That’s a “hefty premium” to most hospital stocks, Cramer said, but “it’s higher quality in an area of health care that’s stronger than the normal hospital business.” He recommended buying in smaller increments as the price increases: any number of shares at $14, half that number at $15 and a quarter at $17. Beyond $17, investors should bow out. And, of course, don’t buy this in the aftermarket. Buy only the IPO, or take a pass.
As previously mentioned, hospital stocks are up big since early March. Tenet Healthcare has soared 536% since the 6th of that month, Health Management Association jumped 295%, Community Health Systems climbed 137%, Universal Health Services added 90%, and Lifepoint Hospitals increased 52%.
“These are huge runs in piping-hot stocks,” Cramer said, “and I don’t see why Select Med should be any different.”
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