Healthcare Services Frail On Client Credit Deterioration, Stifel Says In Downgrade

Healthcare Services Group, Inc. HCSG reported first-quarter bottom-line results in line with consensus, but pressures preventing a beat are seen to endure throughout the year.

The Rating

Stifel Nicolaus analyst Chad Vanacore downgraded Healthcare Services from Buy to Hold and lowered the price target from $57 to $44.

The Thesis

Healthcare Services missed Stifel’s bottom-line estimates on lower-than-expected revenues, largely impacted by an increase in accounts receivables, Vanacore said in a Tuesday note. Although Healthcare Services expects future earnings to be unaffected by AR acceleration, Stifel cut 2018 expectations on growth-flattening headwinds.

“We see risks that credit quality deterioration in HCSG's base of skilled nursing clients could keep the shares rangebound near term,” the analyst said. “Our view is that pressures on the skilled nursing industry will continue through 2018 and into 2019.”

At the same time, the company could record fewer new contracts earlier in the year as it emphasizes collections over sales, and this factor would compound margin growth deceleration, Vanacore said.

Nonetheless, the analyst said he anticipates robust, long-term demand for housekeeping and dining services that offset the aforementioned risks.

“We believe HCSG's housekeeping and dietary services are underpenetrated and the faster-growing, less-mature dietary business should generate modest margin improvement as it grows into an underutilized management infrastructure."

Price Action

Healthcare Services plunged on Tuesday’s earnings report and had not yet recovered Wednesday morning. Shares were set to open down more than 7 percent at $37.70. 

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