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We have reiterated our Neutral recommendation on Gentiva Health Services Inc. (GTIV - Analyst Report) based on rising expenses, Medicare rate cut and legal hassles, which are expected to weigh on the positives. This home health and hospice company carries a Zacks Rank #3 (Hold).

Why Reiterate?

The Zacks Consensus Estimate for Gentiva’s fourth quarter 2012 remained unchanged at 35 cents per share over the past 60 days, due to the lack of any estimate revision. This reflects a decline of 6.7% from the year-ago quarter.

Meanwhile, over the past 60 days, the 2012 estimate remained unchanged as well. Consequently, the Zacks Consensus Estimate for 2012 stands at $1.29 per share, down 19.6% over 2011. This estimate lies within Gentiva’s guidance of $1.20–$1.30 per share.

Gentiva raised its 2012 earnings guidance from $1.00–$1.20 per share during the third-quarter earnings release on Nov 1, 2012. The company reported third-quarter 2012 operating earnings of 32 cents per share, which modestly beat the Zacks Consensus Estimate of 29 cents as well as the year-ago quarter level of 27 cents per share.

The rising expenses of Gentiva are resulting in slower bottom-line growth and weak operating cash flow. Moreover, the changes proposed by the Centers for Medicare & Medicaid Services (CMS) in Jul 2012 are expected to reduce Medicare reimbursements by 0.1% in 2013.This will likely reduce the company’s earnings, which are significantly reliant on Medicare earnings. Further, Gentiva is facing substantial legal trouble over Medicare reimbursements.

However, these negatives are mitigated by various positives. Gentiva’s ability to post robust earnings has been consistent over the years, which has led to a sustained increase in net revenue. Moreover, the company’s strategic acquisitions are expanding its market share, while its focus on specialty services remains impressive.

Other Stocks to Consider

While we maintain a cautious stance on Gentiva, other home health companies such as Addus HomeCare Corporation (ADUS - Snapshot Report) and hospice companies such as HealthSouth Corp. (HLS - Snapshot Report) are worth considering. Both these stocks carry a Zacks Rank #2 (Buy).

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