December 24, 2008 - Psychiatric Solutions, Inc. (PSYS-NASDAQ) together with its subsidiaries, provides inpatient behavioral healthcare services in the United States. The company offers its services for children, adolescents, and adults through acute inpatient behavioral health care facilities and residential treatment centers. Its services include nursing observation and care, daily interventions and oversight by a psychiatrist, and coordinated treatment by a physician-led team of mental health professionals.

This stock traded at 50 cents a share in 2001, then took off in 2003 until it peaked in 2007 at $42.90. If only we'd all bought the stock in 2001. We can now, but a share costs $28. Can it get back to its old high?

Earnings were the fuel for this rocket. While there was a deficit of $1.41 a share in 2000, that was the last year the ink was red. Starting in 2001, earnings per share were 10 cents, then went to 86 cents, faltered to 73 cents, and then recovered to 97 cents in 2004. In 2005, they were down again, to 59 cents. But they've increased each year since, showing $1.14 in 2006, then $1.40. This year, analysts' average estimate for eps is $2.02 and $2.42 next year. For the next 5 years, analysts predict annnual average growth of 21.13%. That's remarkable in an economy that's shrinking. Of course, the fact that the economy is doing so poorly may be the reason business is so brisk at PSYS.

In the third quarter, same-facility revenues rose 8.7% compared to the same quarter last year while admissions were up 8%. These numbers for the same-facility totals include the addition of new beds and show that patients are staying at the facilities.

But not all things are healthy at PSYS. The Department of Justice investigated a PSYS facility in Illinois for incidents that allegedly occurred in 2007 relating to quality of care, always a concern for healthcare providers who run a for-profit business. Recently a newspaper published a story that questioned patient treatment in the company's Sierra Vista, CA. facility, with concerns over poor supervision, understaffing, and inadequate training. Continued bad press could limit referrals or new patients if allegations are proven true. Certainly it invites stronger regulatory scrutiny. Management stated it is working on improving its quality of care.

Another concern: bad debt. Provisions for doubtful accounts went to $10.3 million in the third quarter compared to $7 million in the same period last year. That was 2.3% of revenues, bringing the year to date number to 2%. Management noted that 60% of revenues is from children and adolescents and that a high percentage of those are covered by Medicaid or a state agency where payment is assured.

More numbers: Market Cap is $1.57 billion. Revenues were $1.482 billion last year and expected to be $1.78 billion this year. Price to Book is 1.79. Operating margin was 14.6% for the last 12 months while Profit margin was 5.98%. Total cash is $45 million. Total debt is $1.32 billion. Current ratio is 1.95. Book Value per share is $15.43. Insiders own about 6% of the stock. There are 55.93 million shares outstanding and a float of 50.64 million. There is no dividend.

PSYS has some problems. The outcome of the investigations into quality of care will either help or hurt. The heavy debt load is fine for the moment as interest rates are very low, but if some of the debt needs to be refinanced or is adjustable, tight credit and/or higher interest rates will be a real concern. On the positive side is the increase in admissions and higher revenues and profits. Solid growth is expected for years. And with the stock down about 33% from its highs, the valuation looks attractive. Investigate this stock further if you're considering an investment in the medical industry.

Company Web site: www.psysolutions.com

- Ted Allrich