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We are reiterating our Neutral recommendation on Gentiva Health Services Inc. (GTIV - Analyst Report). Its leading market position, elimination of low-margin business and reduced debt balance are the positive investment considerations. However, the declines in bottom line, cash balance, total assets and operating cash flows are the downsides.

Gentiva reported first-quarter 2012 adjusted earnings (from continuing operations) of 27 cents per share, at par with the Zacks Consensus Estimate, but lower than the year-ago quarter adjusted earnings of 57 cents. Adjusted net income of $9.1 million also compares unfavorably with $19.1 million in the year-ago quarter.

Gentiva, a leading national provider of comprehensive home health services, competes with organizations like Amedisys Inc. (AMED) and Lincare Holdings Inc. (LNCR). With steady improvement in its net revenue, the company’s earnings ability has remained strong over the years.

Gentiva’s revenue witnessed a year-over-year fall during first-quarter 2012, mainly hurt by the sale and closure of some branches coupled with a marginal decline in the Home Health Episodic segment revenue. However, robust performance in the Hospice segment led to a 27% and 25.5% increase in revenues in 2011 and 2010, respectively.

Moreover, Gentiva has been strategically selling off its non-core businesses to reduce costs and focus its resources on its core business. Further, the company amended its senior secured credit agreement in March 2012 to increase the flexibility of its financial covenants over the next few years. The amendment has various positive factors such as alteration in the definition of consolidated EBITDA, increase in the maximum limit for the consolidated leverage ratio and relaxation of the minimum interest coverage ratio requirement.

However, the agreement increased the interest rate on term loans, thereby substantially increasing Gentiva’s interest expenses. The interest rate hike also resulted in a substantial decline in the earnings outlook for 2012. Moreover, rising corporate expenses, interest expenses and selling, general and administrative expenses led to a decline in net income over the past few years.

Moreover, despite the fact that the company still has a sizeable cash balance, rising expenses have weakened Gentiva’s operating cash flow over the past few years. Operating cash flow declined to $5.14 million in 2011 from $142.6 million in 2010, while the cash outflow in the first quarter of 2012 was substantially higher than the year-ago quarter.

Gentiva currently carries a Zacks #2 Rank, which translates into a short-term Buy rating.

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