We have downgraded our recommendation on Gentiva Health Services (GTIV) to Underperform, prompted by poor operating performance coupled with weakening financial position. The company’s second-quarter earnings lagged the Zacks Consensus Estimate, on the back of high interest payments as well as increased expenses, resulting in a deteriorated cash position.
However, the strong growth in Hospice segment, driven by the Odyssey acquisition, led to a huge surge in revenue, which was offset by the rising costs. The company needs to engage in effective cost control, while continuing its current acquisition strategy.
Overall, the future outlook for Gentiva does not look very promising. Our six-month target price of $6.25 equates to 3.0x our earnings estimate for 2011. This price target implies an expected total negative return of 8.4% over that period.
