The difficult U.S. economy has worn down a lot of the competition in the physical therapy business, but U.S. Physical Therapy (USPH) continues to perform robustly. Its shares have sprinted near their 52-week high, at $20.70, way up from where the stock was languishing in February, at $14.

The third-largest operator -- and the only publicly traded pure play in outpatient physical therapy services -- U.S. Physical Therapy operates 372 freestanding therapy centers in 43 states. They offer pre- and post-operative physical and occupational therapy services for athletes or patients with sports injuries, as well as people suffering from orthopedic-related disorders, neurological-related issues or work-related ailments.

USPH keeps delivering "strong operating and financial results, and we believe it will continue to have significant opportunities to drive margin expansion and robust per-share earnings growth," says Brian Tanquilut, analyst at investment firm Jefferies. USPH continues to expand its footprint, he notes, through the opening of new internally developed clinics and through selected strategic acquisitions. Rating the stock a buy, he forecasts earnings to grow 20% annually and revenues by 10% over the next several years.

Fitness Mania

He bases his estimates on management's increasing focus on clinic-level productivity and cost controls, which Tanquilut expects will continue to help expand gross and operating margins. Because of USPH's strong cash flow and clean balance sheet, it has been able to repurchase $1.4 million worth of its shares in the third quarter.

Demand for physical therapy and rehabilitation treatments have been rising feverishly partly because of the increase in fitness mania, and from just plain physical wear and tear among an aging population -- in addition to recurring ailments affecting various parts of the body.

The most common traumas treated that physical therapists treat include lower-back pain, spine, shoulder and rotator-cuff injuries, hip disorders and post-surgery knee rehab -- not to mention the prevalent ankle and foot injuries. Therapy services are done either in inpatient facilities such as acute-care hospitals and rehab facilities, or outpatient clinics that require patients to visit their therapists once, twice or thrice a week for a period of up to six weeks.

A Partnership Structure Is Key


The tendency of commercial plans, corporate employers and government health programs to reduce spending levels by shifting patients to lower-cost options, such outpatient therapy, has been a boon to companies like USPH, analysts say. Medicare patients account for only some 20% of USPH's revenues.

USPH has taken advantage of the long economic downturn by acquiring several physical-therapy companies that found it hard to survive. Unlike most other large providers of outpatient therapy, USPH is structured as partnerships with the physical therapists who manage them. As a result, the clinics are independently branded and continue to carry the clinician partners' names they used prior to partnering with USPH. That has enabled them to cater to and keep their loyal patients in their communities. The partnerships "have been the backbone of USPH's growth," says Jefferies' Tanquilut.

Peter L. Martin of JMP Securities, who rates USPH as "market outperform," has a 12-month price target of $24 a share based largely on the company's strong performance despite a tough economy. He has increased his 2010 earnings estimate to $1.23 a share from $1.20, and his 2011 forecast to $1.41 from $1.39. He notes that USPH is poised to do more acquisitions because it has ample cash and liquidity to jump on strategic deals.

This largely ignored subsector of the vast health care industry hasn't been much highlighted on Wall Street, although investment bank executives and stock traders are probably among those that use physical therapy the most in one form or another. But one positive is that some large institutional investors are very much aware of USPH's appeal. Among the big players that own shares are Royce & Associates, which owns a 13% stake; Columbia Management Investment Advisers, which holds 6.3%; and BlacRock Institutional Trust with 4.8%.

A look at the chart of U.S. Physical Therapy's performance should convince the skeptics and investors not yet privy to it that it's one stock that's definitely working out.


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