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    Sunday, April 27, 2003

    Well, I'm pretty much done with my analysis of Orthodontic Centers or America (OCA). They provide business services to orthodontists and pediatric dentists. They provide the capital to start the business and all of the business services in exchange for fees and profit sharing. They amusingly have 38% of float short (13 days to cover!!). Now at $28 they may have been a short candidate based on fundamentals (though $30 would be my optimistic upside it was a pretty high valuation), with 0% growth and an 11% discount rate (their weighted cost of capital was used to determine the discount rate) their intrinsic value would be around $12 - $14. There are no publicly traded bonds so the shorts are not engaging in capital arbitrage which gives me some comfort after my Allegiance Telecom ulcers! On the upside I see around $30 optimistic case (9% growth off a 67MM base). With excellent liquidity (interest coverage of 15!) there is really little downside risk from $6 and the upside could come quite quickly once the remaining litigation is resolved, earnings return to pre Q4 '02 levels and earnings visibility improves.

    The road to 6. This would be a combination of a crappy market with disclosure concerns in general; somewhat complicated accounting by OCA; current litigation with practices that were acquired through a merger and significant downside surprise in December. I always look for some new faces that are motivated to turn things around and I see that in their new CFO Sandeman. He only came on board in Q4, 02 and used that Quarter to get everything in order and clean house. He will be judged from either Q1 or Q2 '03 onwards. Listening to him on their Q4 conference call gives me confidence. With an incredibly low PE (potentially as low as 4 on my forward looking basis), great liquidity, a sound business model and institutions owning around 90% I am going to invest.

    Q1 '03 Consensus estimates for Q1 03 are 0.26 (.23-.28). I actually expect closer to 0.32 and the math isn't very hard. Basically last quarter was 18c, there were 2 more practices that paid fees all Quarter, 8 or more that paid for half a quarter and 7MM in one time charges that I understand and really believe will not be repeated. In addition there is the possibility of significant upside depending on the resolution of various litigation matters (though the litigation will likely affect cash flow and not revenue or earnings as settlements go to reduce goodwill. Litigants that decide to join OCA, however, would be recognized under revenue.).

    I would expect a double to $12 before their Q2 conference call though I will be watching out if there is a precipitous price drop. I of course, would re-evaluate the fundamentals and if they haven't changed buy more.

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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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