By Jake King
On the back of sequestration cuts and CMS (Centers for Medicare and Medicaid Services) rate changes, another home healthcare provider has guided for a far worse year than analysts anticipated. Gentiva Health (GTIV) on Wednesday morning issued 2013 earnings guidance that is 20% lower than analysts expected (at the midpoint of guidance), and a revenue hit of $30M, a percentage point short of estimates. Home health as a whole is taking a significant hit in the wake of recent regulatory changes, and as we've written before, Amedisys (AMED), another home health provider, is at the epicenter of these negative effects. Amedisys, after lowering full year expectations last week, still trades at a bloated 18.2 times 2013 EPS guidance - as a comparison, GTIV carried a P/E of just 9.7 before Wednesday's lowered guidance.
With deteriorating businesses, a premium earnings multiple simply doesn't make sense, and we don't expect investors to pay up for a declining business in the long-run. We believe AMED is a short, and while there seems to be some demand for the stock in the $11 range, if the stock moves back to $12.25, strong prior resistance and the 200D SMA, it's definitely worth stepping into the short side. Fundamentals aside, bear in mind that if the market rolls over from its current uptrend, weakened businesses (and segments) like Amedisys and home health in general are the first places that institutions turn to for downside protection. Amedisys' overdone P/E simply isn't sustainable.
Analysts anticipated, on average, 2013 EPS of $1.26 on $1.72B in revenue for Gentiva, according to Yahoo Finance. Wednesday, however, Gentiva said it now expects adjusted EPS of $0.90 to $1.10 and revenue of $1.69-$1.71B. The company called this a result of "...the recently issued instructions from the Centers for Medicare & Medicaid Services (CMS) regarding the treatment of sequestration," and "...assumes that sequestration will affect the reimbursement related to Medicare patients whose service dates end on or after April 1, 2013." With the major publicly-traded home health providers all missing earnings and providing disappointing guidance in the recent past (AMED lowered significantly just last week), it's clear that the macro environment for home health organizations, including AMED and GTIV, is under pressure.
We've focused on Amedisys in the past because of its heavy and, in our view, unsustainable P/E multiple. Weakening or in-decline healthcare companies tend to trade at 8-10x earnings due to the uncertainty in the business, but AMED still carries a P/E of almost 20. Based on standard earnings assumptions and the trading ranges of its peers (GTIV's P/E is less than 10), AMED should be trading closer to the $6.50 level based on the mid-point of 2013 earnings guidance ($0.60-0.70). While analyst estimates have been coming down incrementally since late last year, and guidance has come down significantly, thus far there's no evidence that the bottom of the earnings trough has been reached. There's still uncertainty about the depth of the CMS and sequestration effects; it remains to be seen whether these businesses have reached the bottom yet.
We laid out the full short thesis on Amedisys in the past (see PropThink's previous reports here and here), and Gentiva's lowered guidance fully supports our view that the home health segment cannot be relied upon in the near-term. The macro forces at work suggest that paying up for a deteriorating business makes little sense, and AMED trades at a hefty premium to its peers based on its P/E. Further impacting Amedisys are a restructured deal with Humana (HUM) and a number of ongoing government investigations into Amedisys' billing practices. That's not something investors want to see on top of a weakened overall business. While investors wait for earnings to find their bottom, continue to expect weakness or further declines from Amedisys - fair value is in the single digits.
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