We are downgrading our recommendation on
Gentiva Health Services Inc.
(
GTIV
) to 'Neutral' based on increased operating and interest expense
burden, and the expected negative impact of reimbursement rate
cuts. However, strong revenues and enhanced market share via
inorganic growth offset these negatives.
Gentiva reported second-quarter 2012 operating net earnings of
35 cents per share, ahead of the Zacks Consensus Estimate of 28
cents but lower than the year-ago quarter level of 47 cents per
share. Operating net income of $10.7 million also compares
unfavorably with $14.0 million in the year-ago quarter.
Gentiva, which competes with
Amedisys Inc.
(
AMED
) and
HealthSouth Corporation
(
HLS
), is the largest provider of home health and hospice services in
the U.S. based on revenues. Moreover, the company continues to
boost its market share and expand its geographic coverage through
various strategic acquisitions.
The purchase of Family Home Care Corporation in September 2012
should expand Gentiva's foothold in the eastern Washington and
northern Idaho markets as Family Home Care is one of the market
leaders in home health and hospice services in these two states.
Further, the acquisition of North Mississippi Hospice in the same
month is projected to significantly expand the company's presence
in the Northern Mississippi market as the acquired hospice provider
has branches in Tupelo, Oxford and Southaven in Mississippi.
On the flipside, the rising expenses of Gentiva over the past
few quarters have been offsetting the increase in revenue, leading
to reduced bottom-line growth. Hence, Gentiva requires effective
cost control to reap the rewards of rising revenue. Rising expenses
have also weakened its operating cash flow over the past few years,
although the company still has a considerable cash balance.
Additionally, the credit agreement in March 2012 increased the
interest rate on term loans, thereby substantially increasing the
company's future interest expenses. The interest rate hike has also
resulted in a substantial decline in the earnings outlook for
2012.
Further, the changes proposed by the Centers for Medicare &
Medicaid Services (CMS) in July 2012, for Medicare Home Health
Prospective Payment System payments, are expected to trim down
Medicare reimbursements by 0.1% in 2013, thereby reducing Gentiva's
earnings, which are significantly reliant on Medicare earnings. The
previous Medicare reimbursement cut, proposed in October 2011, is
also expected to negatively impact Gentiva's 2012 net income by $35
million.
Overall, we expect modest growth potential for Gentiva in the
long term. The company currently carries a Zacks #3 Rank, implying
a short-term Hold rating.
AMEDISYS INC (AMED): Free Stock Analysis Report
GENTIVA HEALTH (GTIV): Free Stock Analysis
Report
HEALTHSOUTH CP (HLS): Free Stock Analysis
Report
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