Envision Healthcare Fundamentals Are 'Questionable,' Expect A Sell-Off

Shares of Envision Healthcare Corporation EVHC were trading notably lower by more than 30 percent Wednesday morning in reaction to the company's disappointing earnings report.

Envision Healthcare cited the impact of hurricanes Harvey and Irma for its poor performance in the quarter, but even when excluding the impact of the hurricanes, the company's results were "modestly weaker" than expected, KeyBanc Capital Markets' Jason Gurda said in a research report. On top of that, the company's fourth-quarter guidance is not only "substantially below" expectations. Gurda maintains an Overweight rating on Envision Healthcare's stock with an unchanged $67 price target. Related Link: Hurricane Maria May Have Blown Shares Of Popular Down To An Attractive Level

Put into the proper context, the company reported an EBITDA of $256 million (excluding hurricanes) but is now expecting a fourth-quarter EBITDA of $182 million to $202 million, which at the midpoint is $102 million below consensus estimates, the analyst wrote. Moreover, it is "not clear" in the earnings report and press release how management is deriving that figure.

The company also guided its fourth-quarter earnings per share to be in a range of 44 cents to 55 cents, which is well below the $1.00 per share the consensus estimate was looking for.

Finally, in conjunction with the earnings report, Envision Healthcare's management said it is undergoing a broad review of alternatives to boost shareholder value, including continuing to execute on its strategic plan, the analyst wrote (see his track record here).

Related Link: Benzinga's Top Upgrades, Downgrades For November 1, 2017

Jefferies: Not Too Bad Of A Quarter

Envision Healthcare's earnings report was "sufficient or decent enough," Jefferies' Brian Tanquilut said in a research report. The company's EBITDA of $233.5 million (excluding a $22 million impact from the hurricanes) fell short of the consensus estimate by just 4 percent or $11 million, which is "within investors' expectations."

However, the company's fourth-quarter guidance was significantly weak enough for investors to be questioning the overall fundamental outlook and earnings power moving forward. In fact, Envision Healthcare typically sees an EBITDA improvement in the fourth quarter compared to the prior quarter but this appears to be no longer the case.

"It appears that the typical volume ramp in Q4 associated with seasonality (as patients avail of more HC services after hitting their annual deductibles) is much less pronounced this year, just as overall HC utilization trends remain anemic," Tanquilut wrote.

Also important to note that the addition of around 40 contracts in the fourth quarter will likely drag on near-term earnings, the analyst also said.

Finally, management needs to articulate how its fundamentals can improve over the next few quarters and until then shares are justified to undergo a steep sell-off. But the company's decision to undertake a broad strategic review could prove the stock with a "backstop" as it "opens the door to value-creating moves," including a potential sell of the company.

"We believe EVHC can garner enough interest from financial buyers given its breadth of service offerings, deep relationships with leading hospitals systems (HCA, UHS, Ascension), relatively good cash flows that can support a much higher debt load, as well as opportunities to drive improved earnings performance through moves that are better made in a private setting," the analyst said.

Tanquilut maintains a Buy rating on Envision Healthcare's stock with an unchanged $71 price target.