Sun Healthcare Group upgraded by UBS

Health-care service provider Sun Healthcare Group, Inc. (Nasdaq: SUNH) was upgraded today by UBS on account of an expected strong fourth quarter propelled by an increase in Medicare rates and an increase in the number of short-stay rehabilitation units taking higher-acuity patients.

According to UBS analyst Donald Hooker, beginning October 1, the company’s Medicare rate will narrow to 70.2% from 75.8% due to a “reduction in the labor portion of the market basket.” Hooker says the reduction could lead to a positive 30 or 40 basis point comparison in the company’s Medicare rate.

“Notably, this “labor bump” could help partially offset any possible shaving of the 2008 market basket increase,” Hooker wrote in a research note today. “As such, Sun’s 4Q results will benefit from a full market basket starting on October 1.”

Hooker also noted that synergies from Sun’s acquisition of Harborside Healthcare Corp. should create approximately a $3 million year-over-year favorable comparison in the fourth quarter.

Sun acquired Harborside, which provides nursing and long-term care, for $350 million in cash in October 2006.

Hooker said he expects management will raise guidance ahead of a strong fourth quarter. Hooker has a target price of $18 per share. The company currently trades at a forward P/E of 19.1.

Shares of Sun Healthcare (Nasdaq: SUNH) climbed $0.71, or 4.78%, to $15.55 in late morning trading Monday.

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