[Beginning of Cramer's verbatim comments for this segment...]

Jim:          All week, we've been writing a series on IPOs... not how to hype them or how to watch them from the sidelines, as other people get in on the deal and book huge profits... but how you can analyze and make money from them for yourself...

I'm teaching you how to know your IPO, and know what the heck you should do with it...

Today, we're looking at a company called Select Medical (SCM). It's expected to price tomorrow, and it will trade under the ticker, SEM... when it comes public.

Look out, this is a healthcare play... but it's in one of the best, and most expensive parts, of the industry... long-term and acute care hospitals and rehab centers. Unlike a lot of IPOs, Select Med is a real company... real earnings... it's a powerhouse in its industry... the #2 player behind HEALTHSOUTH Corp. (HLS)... and it has a seasoned management team that's worked together for more than 10 years, and has great experience actually running a public company. This is no wet-behind-the-ears IPO. Select Med even has a pedigree as a public company from when it came public in April of 2001. No, that was not a great time for an IPO... to when it was taken private in February of 2005... So it's going public, private, and now public again...

If you were in Select Medical's first IPO, and held it on until it went private, it gave you a 279% gain. the S&P 500 was up just 2.7% over that period, so hey, I think you made money here once... let's check it out again.

The company has 92 long-term specialty acute care hospitals for patients with serious medical conditions... respiratory failure, neuromuscular, cardiac disorders, and severe trauma that requires long-term care. This part of the business represents 70% of Select Medical's sales... almost 80% of its operating income. It's one of the few large players in this business. And HealthSouth, with 99 facilities, is the only one that's bigger. The next-smallest player has 82 facilities and, after the top three, no one else has more than 25, so it's a very elite group.

Select Med is better than just a plain old hospital...

It takes care of very sick people, meaning lots of expensive procedures that could be very lucrative for shareholders. I'm not making a political statement. Just telling you how this business works. I'd like you to consider it like a hospital without the loss-leading emergency room. And, without that, it's a pretty good business. And emergency rooms could be profitable too. I'm just saying that it does not necessarily... you have to, uh, maybe have some money before you go to this place. Let's put it that way... and, again, not being political.

And, no matter how much damage Obamacare might do to other healthcare players, we know he's not going to cut off care to people with respiratory failure, serious trauma, serious heart problems or neuromuscular disorders... This is the kind of healthcare you can't cut back on, because if you do, people die...

The other part of Select Medical's business is outpatient rehab, another very profitable business... it provides physical, occupational and speech rehabilitation services... 948 facilities, 37 states and D.C. It's the largest player in the rehab business by far. This is a fabulous business, trust me. The next closest has just 600 locations...

Business has doubled in size since 2007 when Select Med bought HealthSouth's rehab business. That rehab business, which I have used personally, is extraordinarily good.

Now, the hospital business has been red-hot lately... the stocks have been... Many of them have doubled or tripled from the March lows. Select Med is in the high-priced end of this business. THC... low-end... is up 536% since the March 6th lows... CYH, a very similar company, up 137%. HMA, up 295%. LPNT, up 52%. UHS, up 90%.

These are huge runs in piping-hot stocks, and I don't see why Select Med should be any different. If anything, it should be better than those...

Select Med's larger scale and both the long-term specialty acute care hospital business, and the outpatient rehab business has given it the ability to hold down operating costs, and centralize administrative functions.

The company also sees a major opportunity going forward in in-patient rehab business. The majority of in-patient rehab facilities are in the small- to mid-sized acute care hospitals. Select Med would pull them out of the hospitals, into a free-standing setting, and then build its out-patient facilities around them. To do that, the company already completed a joint venture with Penn State Hershey Medical Center, and it's looking for other large healthcare centers and university hospitals to partner with.

And, while Medicare and Medicaid paid 66% of the bills of Select Med's specialty care business, they only represent 10% of the payor mix on its rehab side. Any damage that comes from an Obamacare, that cuts costs, should be offset by the number of new people coming to Select Med's facilites, who didn't have insurance coverage before. I think it's a push.

Details in the deal...

The company plans to raise $400 million by offering 33.4 million shares. Right now, the talked about range is between $11 and $13 a share. Here's the bankers... Goldman Sachs, Morgan Stanley, Bank of America, Merrill Lynch... That's a pretty darn good pedigree.

Select Med plans to use the proceeds to repay $188 million of long-term loans. It would be good for the company... it would be good for them... because the company has a lot of debt... although Select Med said it expects to be able to cut its leverage in half by 2014, and it should have the free cash flow to do it. So I'm not that worried. A lot of these LBOs (leveraged buyouts), loaded up with debt, and trying to come public to pay down debt... I'm not as concerned about this one. Normally, though, I don't like IPOs of companies that are being sold off, that were formerly LBOs, being sold off by private equity firms... I usually think they're just cashing in, bilking the new shareholders... But neither Welsh Carson, nor Tom Acressi, the two outfits that took Select Med private in 2005, are selling stock on the deal. They're still going to own 60% of the company after the IPO. It's not in their interest just to spit out a piece of garbage, right? Because they're still going to be on it... they're still going to be long. The way I see it, Select Med could be the real deal.

Okay... at that price, between $11 and $13, it's expensive. But, because of today's downturn, I bet we get it at the lower end of the range. Still, Select Med... it's going to be valued at a hefty premium to most hospital stocks... because it's higher quality. It's higher quality in the area of healthcare that's stronger than the normal hospital business.

If I were you... how much would I pay?...

If the price of the deal goes up from the current range, I'd buy in smaller increments. So, in other words, buy all you want at $13. That's still reasonable. But buy half that if the price comes at $15. And buy a quarter of that if this deal's priced at $17. And, above $17, you take a pass. Do not buy.

And remember this... never buy in the aftermarket. If you can't get shares in the IPO, forget about it...

Here's the bottom line...

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Bottom Line:     I think a lot of institutions will want to grab some Select Medical (SCM) when it comes public.  They need exposure to this industry.  I think we got lucky with the end-of-the-day selloff...  I think the underwriters might give us a low-teens way to put money to work in a high-quality, post-Obama worry healthcare stock.  Given the scarcity of healthcare stocks in general, and hospital stocks in particular, Select Med is a chance worth taking.

 

 

 

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