Youth Services shares rise on acquisition Owings Mills firm buying Ala.-based Three Springs

Stock price climbs 14%

$27 million deal could boost revenue by more than a third

April 17, 1996|By Jay Hancock | Jay Hancock,SUN STAFF

Wall Street found more reasons to love Youth Services International Inc. yesterday, as the Owings Mills company announced an acquisition that would boost revenue by more than a third. The news propelled its stock price upward by 14 percent.

Youth Services agreed to buy Three Springs Inc., which is based in Huntsville, Ala., and runs programs for emotionally troubled adolescents. Three Springs operates 13 facilities across the Southeast and is best known for its "therapeutic wilderness" program.

Fast-growing Youth Services runs centers for juvenile delinquents across the country. Its executives signed a letter of intent to buy Three Springs for 800,000 shares of Youth Services stock, worth about $27 million yesterday.

Financial analysts praised the deal as one that would extend Youth Services' reach, add to its correctional tools and boost profits almost immediately.

"If they took over an operating facility in the past, they would delete it and put in their own program," said Dennis Moran, who follows Youth Services for financial house A. G. Edwards in St. Louis. "[Three Springs] has a program that works. They've picked up a growth company that they don't have to turn around."

Three Springs' management will stay on, and Youth Services is expected to add its wilderness program to its treatment menu.

Youth Services stock, which could have been had for $8.25 a share less than a year ago, popped by $4.25 yesterday to close at $34.25, a new high.

"It's a good acquisition. It's really going to solidify their market position in the Southeast as one of the major players," said William Bavin, who follows the company for Baltimore financial house Ferris, Baker Watts. "It ought to add a decent amount to earnings."

Youth Services earned $2.2 million on $53.1 million in revenue for the year ending June 1995. The Three Springs deal is expected to add another $20 million in revenue.

Youth Services said the acquisition would boost earnings, but didn't specify how much.

Even so, at 54 times this year's estimated earnings per share, Youth Services stock is expensive even by the inflated standards of today's market. One explanation: It is being discovered by Wall Street.

"YSI is getting on the map," Mr. Moran said.

In recent weeks, Genesis Merchant, A.G. Edwards and NatWest Securities all assigned financial analysts to the stock, nearly doubling the coverage and raising Youth Service's profile among mutual funds, pension funds and other deep-pocketed investors seeking the next hot growth company. Genesis, Edwards and NatWest all gave Youth Services "buy" ratings.

Wall Street has reason to be interested, Youth Services' fans say. It is the biggest company in what some measure as a multi-billion dollar industry, but its 1995 revenues weren't even $54 million.

Law enforcement agencies increasingly are hiring contractors like Youth Services for youth corrections work. And another trend may help the company even as it hurts society: The number of juvenile delinquents is expected to grow, as baby-boomers' kids move into their teens.

Three Springs has a capacity of about 500 beds. Youth Services treats about 4,000 youths at 19 facilities in 12 states.

If it goes through, and analysts expect that it will, the acquisition will add to Youth Services' facilities in Maryland, Tennessee and Virginia and introduce the company to Alabama and Georgia. Youth Services recently completed the buy of a Tampa, Fla., facility that is expected to add about $10 million in annual revenue.

At almost eight times Three Springs' annual cash flow of $3.5 million, its $27 million price tag is "a little high, but it's probably worth it," Mr. Bavin said.

Pub Date: 4/17/96

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