On Nov 27, 2014, we issued an updated research report on Gentiva Health Services Inc. (GTIV). We expect the proposed Centers for Medicare & Medicaid Services (CMS) rules to pressurize earnings going forward. However, focus on specialty services, inorganic growth and efforts to boost financial flexibility bode well for the long run.
Last month, the company reported third-quarter 2014 earnings that missed the Zacks Consensus Estimate but improved year over year on the consistent success of the One Gentiva initiative and strong business momentum. Notably, this Zacks Rank #1 (Strong Buy) stock delivered positive earnings surprises in two of the last three quarters with an average beat of 24.3%.
Gentiva has been strategically vending its non-core businesses that generate lower returns to reduce costs and focus its resources on its core business. Penned in Oct 2014, the company’s agreement to merge with Kindred Healthcare Inc. (KND) for $1.8 billion is scheduled to culminate by the first quarter of 2015 and is expected to generate considerable revenues and cost synergies. The deal will also allow Gentiva to become part of an enterprise that would emerge as one of the major operators of long-term care hospitals and inpatient rehabilitation facilities in the nation. Meanwhile, Gentiva has been witnessing rising net revenue over the past few years, mainly on account of acquisitions. Net revenue also increased in the first nine months of 2014 primarily driven by an increase in Community Care revenues and Home Health revenues.
Gentiva has also been growing inorganically over the past years to expand its operating leverage. Also, the One Gentiva restructuring initiative has been successful and led to considerable earnings improvement in the third quarter of 2014. Further, the Harden acquisition has helped the company boost its EBITDA for most of the past four quarters and also positions Gentiva favorably to achieve its goals of generating $1.96–$2.0 billion in revenues and $0.95–$1.15 per share in earnings in 2014. Moreover, Gentiva’s focus on specialty services remains impressive.
On the flip side, Gentiva has been witnessing an increase in selling, general and administrative (SG&A) expenses over quite some time. SG&A expenses also escalated in the first nine months of 2014, primarily owing to higher charges related to cost saving initiatives as well as acquisitions and integration activities.
The changes proposed by the CMS for Medicare Home Health Prospective Payment System in Oct 2014, included a 2.82% reduction for rebasing of Medicare reimbursement rates. Further, annual reductions are expected for 2016 and 2017, thereby adversely affecting Gentiva’s earnings, which are significantly dependant on Medicare earnings. Moreover, the operating cash flow has been facing significant fluctuations owing to high legal and other costs as well as weak operating results.
Other Stocks to Consider
Investors interested in the health care industry may consider other well-performing stocks like Almost Family Inc. (AFAM), and AmSurg Corp. (AMSG). Both have the same Zacks Rank as Gentiva.
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