Gentiva Balanced on Risks, Rewards - Analyst Blog

On May 19, 2014, we issued an updated research report on Gentiva Health Services Inc. GTIV. The company's inorganic growth strategies and expense reduction initiatives position it to generate growth going forward. However, we remain concerned about the waning cash flow level and effect of the changes introduced by the Centers for Medicare & Medicaid Services CMS.

Earlier, Gentiva reported first-quarter 2014 earnings that surpassed the Zacks Consensus Estimate. However, the company's operations were disrupted by a severe winter, as a result of which earnings declined year over year.

Gentiva has been growing inorganically over the years to expand its operating leverage. In recent times, the acquisition of Harden Healthcare has been of importance as it boosted episodic admissions. Gentiva is also operating in two non-Harden community care sites in North Carolina, which have scope for further expansion. Moreover, the company expects to continue its acquisition spree in hospice and home health to improve its market density, provide quality service and exhibit long-term growth.

Apart from acquisitions and divestitures, the recent rejection of the takeover proposal made by Kindred could prove beneficial for this Zacks Rank #3 (Hold) stock, as this may now impel the company to tighten its financial structure and policies to gain investors' confidence. Gentiva's focus on specialty services also remains impressive. With the gradual increase in the ageing population, rise in specialty programs (targeted to aid this aging population) bodes well for margin improvement.

Gentiva remains focused in its cost containment initiatives. The company began reducing direct expenses since the fourth quarter of 2013 pertaining to the drop in average daily patient census. This was continued through the first quarter of 2014 as well, leading to a sequential margin improvement. Growth in margins is expected to continue through the rest of 2014 on the back of these expense reduction initiatives
 
On the flip side, Sustainable Growth Rate (SGR) cuts in home health Medicare, impact of the sequestration rate cut on Medicare-based revenues and decline in Hospice revenues have restricted the desired revenue growth in recent times.

Moreover, the changes proposed by the CMS for Medicare Home Health Prospective Payment System have adversely affected Gentiva's earnings. Additionally, as per the recent legislation introduced in the U.S. House of Representatives, Medicare reimbursements to home health are expected to fall further by around $200 million in 2014.

Gentiva has been facing considerable legal hassles concerning Medicare reimbursements.  Higher legal and other costs have lowered the company's operating cash flow in the past year. Further, adding to the financial risks, an operating cash outflow of $17.7 billion was witnessed in the first quarter of 2014. If operating cash flow suffers significant declines, Gentiva will be compelled to delay its planned capital expenditures and cut short its capital deployments going forward.

Other Stocks to Consider

Investors interested in the healthcare services space could consider stocks like Almost Family Inc. AFAM, Amedisys Inc. AMED and RadNet, Inc. RDNT Of these, Almost Family sports a Zacks Rank #1 (Strong Buy), while Amedisys and RadNet carry a Zacks Rank #2 (Buy).

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