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By JESSICA TOLEDANO

Staff Reporter

Like many health-related companies, Total Renal Care Holdings Inc. has gone through some rough sledding on Wall Street in recent months. Its stock, which reached a 52-week high in late June, took a serious dive in early September.

And except for a few blips since then, it has closely clung to the bottom of its 52-week trading range.

Does this spell trouble for America’s second-largest provider of kidney dialysis? Most analysts say no, although there may be danger signs on the horizon involving its exposure to the troubled Medicare market.

“I think their share price today is much more a function of market jitters and general concern about the health care industry,” said Howard Capek, vice president of equity research for Credit Suisse First Boston in New York. “Fundamentally, the company has continued to meet or beat stock projections. The stock price does not reflect the solid fundamentals of the company.”

In fact, the financial record of the Torrance-based dialysis company has been heading in the opposite direction of its poorly performing stock, which was trading last week at around $21.50 compared with a 52-week high of $36.13.

For the second quarter ended June 30, net income was $19.6 million (24 cents per diluted share), compared with $8.9 million (20 cents) for the like period a year ago. Second-quarter revenues were $288 million vs. $104.8 million.

For the year ended Dec. 31, 1997, net income was $55 million (71 cents), up from $34.4 million (46 cents) in 1996.

John King, senior vice president and chief financial officer, said the stock drop was related to downside earnings surprises from a number of major health care companies. The market sentiment created a ripple effect that hit related contractors like Total Renal Care.

“The earnings (for publicly held health care companies) were much less than expected,” said King. “And sectors of the health care industry that depend on them for referrals were affected as well.”

Total Renal Care has relationships with Kaiser Permanente, Maxicare, Health Net, Blue Cross of California and PacificCare, to name a few.

The health care industry’s troubles were only part of the problem, say analysts. In May, Blue Cross & Blue Shield of North Florida began to review Total Renal Care’s practices, and is questioning the “medical need” of some tests. Blue Cross & Blue Shield has temporarily suspended Medicare lab payments during the review, sending a chill through investors. Total Renal Care handles about 70 percent of Blue Cross’ medical tests for 33,700 patients.

But King said the contract only makes up 2 percent of the company’s consolidated revenues and Blue Cross is not taking issue with the core dialysis business. Moreover, he said, the dispute is not expected to hurt any other part of the business.

“The uncertainty of the situation has posed the stock to underperform,” said John Hindelong, an analyst at Donaldson, Lufkin & Jenrette LLP, which has an investment banking relationship with Total Renal Care. “These days, investors in health services are paranoid about government-related issues, because the government has been incredibly inconsistent and unpredictable.”

The federal government has cut back on Medicare reimbursements, which has prompted many HMOs to pull out of the Medicare business, saying it is not profitable enough anymore.

The same problem confronts Total Renal Care. Medicare accounts for about two-thirds of its revenues.

Still, analysts say the company is generally on track.

Capek of Credit Suisse projects net income for the end of the year at $107 million ($1.30 per diluted share), and $148 million ($1.73 per share) in 1999. (Capek said Credit Suisse has no financial connection to Total Renal Care.)

Capek projects more than 30 percent growth, based on its recent and future acquisition strategy. In February, Total Renal Care completed its acquisition of Renal Treatment Centers Inc., a slightly smaller rival based in Berwin, Penn. The deal was valued at around $1.3 billion, and one-time charges related to the purchase resulted in a first-quarter loss of $52.8 million.

The acquisition made Total Renal Care the second-largest kidney dialysis provider in the country, with more than 358 centers and about 25,900 patients in 32 states.

The company plans to continue its aggressive acquisition strategy. “We still plan to acquire domestically and internationally,” said King. “I think health care services and health care in general will become much more in favor in the next couple years.”

Industry projections call for an 8 percent to 9 percent growth rate for the entire dialysis industry over the next few years.