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Envision Healthcare Hurt by High Debt, Increasing Expenses

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On Aug 11, we issued an updated research report on Envision Healthcare Corp. (EVHC - Free Report) , a provider of physician-led services, ambulatory surgery centre management, post-acute care and medical transportation.

During the most recently reported quarter, the company’s earnings beat estimates but declined year over year due to a significant rise in operating expenses. It is to be noted that the company’s operating expense has been increasing over the past many years.

Most alarming is the rate of increase of operating expense which is exceeding the revenue growth rate. In the first half of 2017, expense rose by 191.4%, surpassing revenue growth of 165%. This increase in expense has put pressure on the bottom line and will continue to do so in the coming quarters.

We also remain concerned with the 2017 guidance cut for the second time so far this year. The company lowered its revenue guidance to $7.75–$8.00 billion (from the previous guidance of $7.80 billion to $8.05 billion), adjusted EBIDTA to $1.02 billion to $1.04 billion (from $1.038 billion to $1.066 billion) and adjusted EPS to $3.35 to $3.45 (from $3.38 to $3.52). This raises questions on the company’s ability to perform thus raising skepticism among investors.

Shares of the company have suffered a loss of 16.7% year to date, compared with a decline of 1.2% for the industry. Given the headwinds faced by the company and a reduction in guidance, we do not expect any respite for the shares in the coming quarters.

Also the company’s saddles high debt, which has been increasing for the past many years. As of Dec 31, 2016, the company had total debt, approximately $5.79 billion, 145.6% higer year over year. For the first half the same increased 8.4% year over year. The rise in leverage has consequently led to a spike in interest expense. The same for first half of 2017 increased 73% year over year. Such high debt levels increase leverage risk and increasing interest costs may dent the company’s margins.  

Further, Envision Healthcare’s trailing 12-month return on equity (ROE) undermines its growth potential. The company’s ROE of 5.35%, has declined in the past four years and remains significantly lower than the ROE of 12.6% for the industry, and 16.04% for the S&P 500, reflecting inefficiency in using shareholder funds.

Envision Healthcare carries a Zacks Rank #4 (Sell). Some better-ranked players in the space are Amedisys Inc. (AMED - Free Report) , Chemed Corp. (CHE - Free Report) and Pharmerica Corporation . Each of these stocks carries a Zacks Rank # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Amedisys beat estimates in three of the last four quarters with an average positive surprise of 12.2%.

Pharmerica Corp. surpassed estimates in two of the last four quarters with an average positive surprise of 1.3%.

Chemed Corp.’s second-quarter earnings beat the Zacks Consensus Estimate by 14.4%.

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