We reiterated our Underperform rating on Gentiva Health Services Inc. (GTIV) on the back of high interest payments as well as increasing operating expenses, which led to a net loss and negative operating cash flow in the third quarter of 2011.
Gentiva reported third-quarter operating earnings per share of 27 cents, lagging the Zacks Consensus Estimate of 48 cents as well as 71 cents earned in the year-ago quarter. The operating income of $8.3 million also compares negatively with $21.6 million earned in the year-ago quarter.
The negatives outweigh the positives for Gentiva. The final rules issued by the Centers for Medicare & Medicaid Services (CMS) for Medicare home health payments in November 2010 led to a decline of about 5.22% in the Medicare home health reimbursement rates in 2011.
Moreover, the changes proposed by the CMS in October 2011, for Medicare home health payments would reduce Medicare reimbursements by 2.31%, thereby reducing Gentiva’s earnings. The rate cut was one of the main reasons for the downward revision of 2011 earnings guidance by the company.
Additionally, Gentiva’s cash position has been weakening over the past few years, creating uncertainty about the company’s future liquidity. While cash and cash equivalents increased to $196.1 million as on September 30, 2011, the rise was mainly due to the proceeds of $142.2 million from sale of assets and businesses in the third quarter of 2011, which is not a sustainable source of cash inflow.
Furthermore, rising expenses of Gentiva are negating the increase in revenue, leading to reduced bottom-line growth. However, the company took steps to reduce expenses in the third quarter of 2011, the outcome of which will be apparent in the forthcoming quarters.
Meanwhile, Gentiva is facing substantial legal trouble over Medicare reimbursements. The Senate Finance Committee alleged that Gentiva and two other health care companies deliberately increased their visits to patients in order to reach the thresholds for bonuses and hence, receive higher Medicare payments from the government.
Investors of Gentiva have also filed multiple lawsuits against the company claiming that management issued a series of false and misleading financial statements from July 31, 2008 onwards, to drive up share value. The complaints further claim that management overstated the in-home therapy visits to patients with the intention of generating higher Medicare reimbursement rates.
Additionally, Gentiva is also losing the confidence of rating agencies. In November 2011, Standard & Poor’s (S&P) downgraded the company’s corporate credit rating for the second time in the past four months. In September 2011, Moody’s Investor Services also downgraded Gentiva’s Corporate Family Ratings. Additionally, both S&P and Moody’s indicated the possibility of a further rating downgrade in the near future.
On the positive side, however, Gentiva’s earnings ability has remained strong with net revenues increasing through the years. Moreover, the company’s leading market position, the continued shift in mix to Medicare and non-Medicare Prospective Payment System business, elimination of lower margin business, growth of the company’s specialty programs and the money-spinning acquisitions by Gentiva are expected to prolong the revenue growth trend.
Additionally, the acquisition of Odyssey has made Gentiva the leading hospice care provider in the U.S., as the home health and hospice care operations of both the firms fairly complement each other without geographically overlapping operations.
Moreover, the company’s focus on specialty services remains impressive as it involves individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery.
The services also help patients who have experienced neurological injuries by removing the obstacles to healing in their homes and address the needs of patients with age-related diseases and issues enabling them to safely stay in their homes.
Overall, the future outlook for Gentiva does not look very promising. The Zacks Consensus Estimate of earnings for the fourth quarter of 2011 is currently at 31 cents per share, down 55.9% year over year. Of the 7 firms covering the stock, 6 firms revised their estimates downward in the past 30 days, while no upward revisions were witnessed.
For 2011, Gentiva’s earnings are expected to be $1.66 per share, sinking about 41.2% year over year. The company is a leading national provider of comprehensive home health services and competes with organizations like Amedisys Inc. (AMED) and Lincare Holdings Inc. (LNCR).
Gentiva currently carries a Zacks #5 Rank, implying a short-term Strong Sell rating.
