Advocat's Q4 Numbers Only Tell Half the Story (AVCA)

The Microcap Speculator submits: Shares of nursing home operator Advocat Inc. (ticker: AVCA.OB) were up over 7.5% Friday after the company reported strong fourth quarter and year end earnings.

For 2005, net income from continuing operations was $30.6 million (versus $12.5 million in 2004), or $4.69 per diluted share. Please note that figure includes two very large non-cash gains, a $4.0 million gain for reduction in professional liability reserves and a $13.8 million income tax benefit. Without these gains, the company earned $12.8 million, or $1.97 per diluted share.

The company did book $5.3 million in losses from discontinued operations. I need to do a little further digging, but I believe this relates to facilities sold in 2005 and the North Carolina facilities, which are under a sales agreement that should close shortly. Considering discontinued as well as continuing operations, net of one-time gains, we end up with a rock solid adjusted net income of $8.5 million, or $1.30 per share.

The top line looked good too. Revenue grew to $203.7 million in 2005 (versus $191.2 million in 2004). According to the company, the increase resulted mostly from Medicare rate increases, higher Medicaid rates in certain states, and increased Medicare utilization. If the company can increase its bed utilization rate, revenues and profits could grow either further.

I really like the numbers, but they only tell half the story. More importantly, this company has a defined strategy and is executing well. It is relentlessly pruning unprofitable operations, solidifying its balance sheet, and building shareholder value. Fundamentals have grown as much, if not more, than the stock price. I expect this to continue in 2006.

DISCLOSURE: I am long AVCA.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

AVCA 1-Yr Price Performance: