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After bidding the stock up from around 5 to 21 over the past year, investors in Advocat, Inc. (AVCA) had lofty expectations coming into the company's Q3 2006 earnings release. The results? Advocat reported net income from continuing operations of $9.5 million, or $1.39 per fully-diluted share, but $8.0 million of that was from a noncash tax benefit.

Back out the tax benefit and a small one-time charge, and the company only earned $2.4 million in operating income, or $0.1 million more than in the prior year quarter. That's almost a rounding error.

CEO William Council remarked:

"The third quarter and subsequent weeks marked several notable accomplishments in the Company's turnaround, including:

  • Successful refinancing of $31 million in debt with all covenants being brought into compliance
  • The listing of our common stock on NASDAQ
  • Renewal of our Master Lease with Omega Healthcare Investors to extend term and provide additional financing for facility renovation
  • Restructuring of the convertible preferred to reduce common stock dilution
  • Achieved a new high of 77.9% in overall occupancy

"These accomplishments are allowing our shareholders to benefit from the improved capital structure of the Company. Although seasonal Medicare declines were greater than we expected, we are optimistic that Medicare census will recover in the fourth quarter and we are pleased with the continued growth in total census compared to last year. We are on target to complete additional renovations during the next 12 to 18 months, and think these renovation projects will position us to continue growth in total census and Medicare census."

I don't believe that investors will share his assessment of the quarter. Simply put, when your stock is up several hundred percent, 4% year-over-year growth is unacceptable. I expect that Advocat shares will be sold down tomorrow. There are reasons to believe that the fourth quarter will be better, but this quarter will likely be seen as a disappointment.

Disclosure: I have no position in AVCA.

Source: Advocat Earnings: Not Good Enough