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We are maintaining our ‘Neutral’ recommendation on Gentiva Health Services Inc. (GTIV - Analyst Report) as its strong market position, divestiture of low-margin business and growth from specialty programs are offset by a decline in cash balance as well as shareholders’ equity. Ratings downgrade and legal issues are the other downsides.

Gentiva reported fourth-quarter 2011 operating earnings of $11.3 million or 37 cents per share, surpassing the Zacks Consensus Estimate of 31 cents. However, the income compared unfavorably with $20.9 million or 69 cents earned in the year-ago quarter.

Gentiva is a leading national provider of comprehensive home health services and competes with organizations like Amedisys Inc. (AMED - Analyst Report) and Lincare Holdings Inc. . The company’s earning ability has remained strong over the years, supported by regular growth in net revenues. With the exception of 2009, which was negatively affected by the divestiture of the CareCentrix business, the company’s revenues have been rising steadily since 2006.

Moreover, the Hospice segment of Gentiva has been generating strong growth since the acquisition of Odyssey in August 2010. The acquisition has made Gentiva one of the leading hospice care providers in the U.S.

However, the rising expenses of Gentiva are negating the increase in revenues, leading to a reduced bottom-line growth. The company’s corporate, interest and selling, general and administrative expenses have been increasing since 2009. Consequently, the operating income for 2011 showed a 41% decline from 2010, while the company reported a net loss in 2011.

Moreover, rising expenses have weakened Gentiva’s operating cash flows over the past few years, although the company still has a substantial cash balance. Further, the amendment of the senior secured credit agreement in March 2012 increased the interest rate on term loans, thereby substantially amplifying the company’s interest expenses.

The interest rate hike has also resulted in a substantial decline in the earnings outlook for 2012. With considerable capital expenditure required every quarter, Gentiva needs to check its cash outflows.

The Zacks Consensus Estimate of earnings for Gentiva for the first quarter of 2012 is currently 27 cents per share, down by an estimated 48% year over year. For 2012, earnings are expected to be $1.11 per share, showing a projected decline of roughly 31% over 2011.

Gentiva currently carries a Zacks #3 Rank, implying a short-term ‘Hold’ rating.

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