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Bear of the Day: Capital Senior Living Corp (CSU)

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Uncontrollable outside forces can have huge impacts on a company without much notice, and the subsequent aftershocks can last for longer periods of time than expected.  This is the case of our Zacks Bear of the Day: Capital Senior Living (CSU - Free Report) , who saw occupancy rates decline, and experienced higher than expected healthcare claims which caused their margins to contract.  

This Zacks Rank #5 (Strong Sell) company is one of the largest providers of senior living services in the United States. The Company currently owns interests in and/or operates 33 communities in 17 states with a capacity of approximately 5,000 residents, including 17 communities in which it owns interests, 15 communities that it manages for third parties. The Company also operates one home health care agency.

Recent Earnings Results

On November 1, management released Q3 16 results where they missed both the Zacks consensus earnings and revenue estimates.  On the positive, management reported that year over year revenues increase by +6.7%, and the average monthly rent for the company’s consolidated communities rose by $106 per occupied unit, or +3.2%.  On the negative, occupancy for the company’s consolidated communities fell by 50 basis points when compared to Q2 16.  The reason for the decline was due to a higher attrition rate (9.5%) during the quarter.  This -9.5% decline significantly outpaced the +5.4% move in rate.  Further, this occupancy decline is expected to spill into the fourth quarter 2016.  Lastly, higher healthcare claims expenses were a drag on the company’s margins.  

Management’s Take

According to Lawrence Cohen, CEO, “We made steady progress in the third quarter on important operational and corporate objectives related to positioning the Company for sustained solid growth, including the announcement of the pending strategic purchase of four communities we currently lease, as we look to continue to increase our real estate ownership.  The Company’s third quarter results were impacted by two non-controllable items, attrition and healthcare claims. We experienced very strong demand at our communities in the third quarter of 2016, with same-community move-ins increasing 5.4% over the third quarter of 2015; however, same-community attrition increased an unusually high 9.5% during the quarter, which impacted our occupancy and revenue. We also experienced an unusual spike in healthcare claims in the third quarter, resulting in a significant increase in the Company’s G&A expense.”

Price and Consensus Graph

As you can see in the price and earnings consensus graph below, the company’s stock price has been trending downwards since 2015, and future estimates are below the current stock price as well.

CAPITAL SR LIVG Price and Consensus

CAPITAL SR LIVG Price and Consensus | CAPITAL SR LIVG Quote

Declining Estimates

Over the past 30 days, earnings estimates have declined for Q4 16, Q1 17, FY 16, and FY 17; Q4 16 fell from $0.01 to -$0.17, Q1 17 dropped from -$0.01 to -$0.14, FY 16 slipped from -$0.03 to -$0.22, and FY 17 plummeted from $0.06 to -$0.44.  

Bottom Line

The decline in occupancy is the major concern for both management and investors.  While this was unexpected, and unusually high, management stated that it is a non-controllable item.  One of the biggest headwinds facing the company is the recent unprecedented levels of new unit supplies.  Therefore, it might be a while before the occupancy issue is resolved.

If you are inclined to invest in the Medical-Nursing Homes segment, you would be best served by looking into Genesis Healthcare (GEN - Free Report) , and or Team Health Holdings (TMH), both of which currently carry a Zacks Rank #2 (Buy).

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