We are downgrading Gentiva Health Services Inc. (GTIV) to Neutral because of concerns related to the intense competition faced by the company’s products, the vulnerability of Gentiva to reimbursement risk and the inherent risks associated with the company’s growth-by-acquisition strategy.
 
Gentiva, founded in 1999 and headquartered in Atlanta, Georgia, provides home health services in the United States. It serves nearly 500,000 patients annually in more than 380 locations across 39 states. Gentiva provides various services to patients, including skilled nursing; physical, occupational, speech and neuro-rehabilitation therapy services; cardiac and pulmonary care; disease and pain management; respiratory services and home medical equipment (HME); infusion therapy and hospice services.
 
Even though we are pleased with the company’s wide range of products and broad customer base, the highly competitive industry in which the company operates is a concern. It competes with players like American Homepatient Inc., Amedisys Inc. (AMED) and Apria Healthcare Group Inc.
 
The company is highly vulnerable to reimbursement risk given that Medicare is the largest single purchaser of services. In fiscal 2008, approximately 66% of Gentiva’s total net revenues were generated from Medicare, Medicaid and local government programs.
 
Gentiva has successfully grown through acquisitions. During the past few years, the company has completed multiple acquisitions, whose aggregate annualized revenues were in excess of $360 million. However, the growth-by-acquisition strategy adopted by the company has inherent risks.
 
Our price target of $28 is based on 13.3x our 2009 earnings estimate of $2.11.
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