Catering to rural populations, LifePoint Hospitals (Nasdaq:LPNT) has been making money on a steady basis for years. Yet, its stock has consistently traded over the past decade between $20 and $40. Currently just under $40, I look at why it's a perfect time for it to shoot passed $40 and into the $50s.

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Stock Price

When I write stock recommendations I usually end the discussion talking about price. However, in this instance, I'm going to put the conversation upfront because I think investors need to know the hurdle it's about to jump is a significant obstacle. If you take its annual return over the last decade and remove the best and worst years--42.4 and -23.2%, respectively--you will see that it hasn't lost much, but it hasn't made much either. Mediocre would be the best way to describe its stock's performance. Over a 10-year period ended June 11, its annualized total return is -0.08%. That's marginally better than its peers in the medical care industry, but 474 points worse than the S&P 500. Great stocks beat all comers including major indexes as well as the competition. So, what I want to do is figure out why it's underperforming and whether its past will permanently dictate its future. Then I can accurately assess its merits as a long-term buy.

Who Is LifePoint?

LifePoint only began its life as an independent company in May 1999 when it was spun off from Columbia/HCA Healthcare, and its sister spin off was Triad Hospitals. Shareholders received one share of LifePoint and one share of Triad for every 19 shares of the parent. LifePoint was originally created by HCA in November 1997 to operate general acute care hospitals in non-urban communities. Its growth spurt came in April 2005 when it merged with Province Healthcare Company, an operator of 21 hospitals in rural areas. Paying $1.7 billion for the company, including issuing 15 million shares, the combined business would have 50 hospitals in 19 states and revenues of $1.9 billion by the end of 2005. It has grown revenues every year since then. In June, it announced it was buying Woods Memorial Hospital in Etowah, Tennessee, its 55th hospital. Business is good.

Profitability

LifePoint completed fiscal 2005 with income from continuing operations of $79.0 million or 4.3% of revenue. Six years later it was $165.5 million or 5.5% of revenue. An increase of 120 basis points over six years might not seem like a lot but given the healthcare environment that's existed in recent years, it's more than plenty. In fact, it's better than three of its closest peers by market cap: Community Health Systems (NYSE:CYH), Tenet Healthcare (NYSE:THC) and Health Management Associates (NYSE:HMA). LifePoint's gotten off to a good start in 2012 with first quarter revenues increasing 12.2% to $851.0 million with continuing operations up 22.3% to $56 million. As a result of a good first quarter, management raised its full-year guidance from a range of $3.05 to $3.30 a share to $3.35 to $3.60 diluted earnings per share. Assuming it hits the bottom of the range, its earnings per share will have increased 11.8% annually over the last decade, yet its share price has only increased 2.7% on an annualized basis. Share prices long-term generally follow earnings. Look for reversion to the mean to kick in at some point in the future.

The Bottom Line

The biggest reason I like LifePoint is because it serves rural communities that might not have a hospital if not for its strategy of entering smaller communities. Sam Walton's original business plan was to go where others wouldn't. Wal-Mart (NYSE:WMT) turned out OK. So too will LifePoint. Patient investors will reap rewards.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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