We are upgrading our recommendation on
Gentiva Health Services Inc.
) to Outperform based on its strong revenues and strategic
acquisitions. Furthermore, a reduced debt balance improved its
financial leverage, while a better operating performance led to an
improvement in net cash from operating activities and free cash
Gentiva reported second-quarter 2012 net earnings of 35 cents
per share, exceeding the Zacks Consensus Estimate of 28 cents but
lower than last year's 47 cents. Net income of $10.7 million also
compares unfavorably with $14 million in the year-ago quarter.
Gentiva is a leading national provider of comprehensive home
health services and competes with
), among others. The company's earning ability has remained strong
over the years with its net revenues increasing consistently. Based
on revenues, the company is currently the largest provider of home
health and hospice services in the U.S.
Moreover, Gentiva's focus on specialty programs, targeted to aid
the aging population, remains impressive. The company also
undertakes strategic acquisitions to expand its scope of operations
and geographic coverage. The acquisition of Advocate Hospice in
July 2012 is expected to spread out Gentiva's coverage in central
and southern Indiana and leverage the company's existing hospice
and home health facilities in the state.
However, the changes proposed by the Centers for Medicare &
Medicaid Services (CMS) for Medicare Home Health Prospective
Payment System payments are expected to reduce Medicare
reimbursements by 0.1% in 2013, thereby reducing Gentiva's
earnings, which rely significantly on Medicare earnings. The
previous Medicare reimbursement cut, proposed in October 2011, is
also expected to negatively impact Gentiva's 2012 earnings by $35
Furthermore, the rising expenses of Gentiva are negating the
increase in revenues, leading to reduced bottom-line growth. Rising
expenses have 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 interest expenses.
Overall, we see strong growth potential for Gentiva in the long
term. The company carries a Zacks #2 Rank, which translates into a
short-term Buy rating.
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GENTIVA HEALTH (GTIV): Free Stock Analysis
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