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On May 28, 2013, we downgraded Gentiva Health Services Inc. (GTIV - Analyst Report) to Underperform from Neutral based on its weak first-quarter earnings on the back of consistently declining revenues along with uncertain regulatory environment and legal problems. Gentiva carries a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Following Gentiva’s weak first-quarter earnings, analysts have been revising their estimates downward. On May 9, 2013, the company reported first-quarter 2013 net operating earnings of 23 cents per share, which lagged the Zacks Consensus Estimate of 31 cents as well as the year-ago quarter level of 24 cents per share.

Five of six estimates moved south in the last 30 days, dragging the Zacks Consensus Estimate for 2013 by 9.8% to 92 cents. For 2014, the Zacks Consensus Estimate moved down by 9.4% to $1.06 as all 5 estimates were nudged downward over the same time frame.

Cause for Concern

Saleand disposal of branches along with rate cuts have adversely affected Gentiva’s revenues in the last few quarters. As a result, despite acquisitions, net revenue declined to $1.71 billion in 2012 from $1.80 billion in 2011. Both Home Health and Hospice revenues of Gentiva declined, contributing to the 4.8% decline in net revenue.

Even in the first quarter of 2013, Gentiva witnessed a 5% year-over-year decline in net revenue to $415.6 million. The year-over-year decline was largely due to a significant cut in the Home Health Medicare rates along with the impact of sequestration, and the sale and closure of some branches.

Moreover, the changes proposed by the Centers for Medicare & Medicaid Services (CMS) for Medicare Home Health Prospective Payment System payments reduced Medicare reimbursements by 1% for 2013. This in turn reduced Gentiva’s earnings, which are significantly reliant on Medicare earnings.

Healthcare Stocks to Consider

While we prefer to avoid Gentiva until we see signs of improvement in the company's performance, other healthcare companies worth considering are Molina Healthcare Inc. (MOH - Analyst Report), Addus HomeCare Corp (ADUS - Snapshot Report) and HEALTHSOUTH Corp. (HLS - Snapshot Report). Both these companies carry a Zacks Rank #1 (Strong Buy).

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