Advocat Earnings: Not Good Enough

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.

Comments

[Amit Chokshi:]

I am a bit disappointed by the numbers and while the stock got hammered in AH trading, I still believe it's a good buy. AVCA's industry doesn't grow their top line on a "same-stores" basis all that much, new centers need to be opened to really drive growth. Even in 2005 the Company had about 6.5% sales growth from 2004. The company is still making the right moves, you noted the restructuring of their convertible preferred which was an excellent move, and they also got a exchange listing.

The tax benefit did mask what the real operating performance was but keep in mind the same thing happened in Q2 with a big reversal in professional liability costs. This stock's valuation relative to Kindred and other competitors is very attractive so while I'd prefer to see some better growth I'm content with solid cash flow and the changes management is making.

2006 Nov 09 08:35 AM

[Bob Misko:]

I just took a quick peek at AVCA.
The accounts receivables appears very
high compared to the revenue growth.
Are these bad debts, or are they fluffing
up the revenue? I like cash flow (free) but
there is not enough to catch my interest as
yet.
Good luch with the stock.

2007 Feb 02 02:25 PM