Shares of Envision Healthcare Corp. tumbled to a 52-week low of $26.34 during the trading session on Nov 6. The slide is believed to have been driven by poor third-quarter results and a subsequent guidance cut.
Over the past 52 weeks, shares of Envision Healthcare have ranged from a low of $26.34 to a high of $74.75. The average volume of shares traded over the last three months is approximately 3.26 million.
Poor Results Bother
Investors were particularly disappointed by lackluster third-quarter results which missed the Zacks Consensus Estimate by 16.1% and declined 36% year over year. Earnings from its Physician Services and Ambulatory Service operations were impacted by hurricanes Harvey and Irma, which had a negative impact of $22 million on revenues.
Also, lower-than-anticipated volumes for emergency medicines and a lower-than-expected anesthesia rate adversely impacted the top line in its core Physician Services business.
The continued shift in the composition of health insurance exchange patients from higher paying carriers to carriers that pay a lower rate per encounter, as well as lower acuity, will keep patient volumes under pressure going ahead.
Envision Healthcare has struggled following its merger with AmSurg, as soft industry volumes and weaker execution have plagued results. Since then the shares have lost nearly 60% compared with a decline of 7.5% for the industry.
Also concerning is fact that the company is reeling under escalating operating expenses for several quarters, due to higher salaries and benefits expenses. The rate of increase in operating expense is the most alarming as it has overshadowed the revenue growth rate, thereby thwarting bottom-line growth. The same was seen in the third quarter.
The company’s fourth-quarter outlook was grim as it baked in declining emergency medicine volumes and the effect of start up costs. The company now anticipates emergency volume that will be lower than the run rate in the third quarter. The company thus reduced its emergency volume growth expectation from 3% to flat. It also reduced its emergency rates to amounts consistent with the third quarter. These two factors account for approximately $28 million of adjusted EBITDA.
Second, the company’s previous forecast assumed a lift in anesthesia rate, similar to what it experienced in the fourth quarter of 2016. Its revised outlook assumes the same anesthesia rate as it experienced in the third quarter. From the prior year, the anesthesia rate is projected to decline approximately 2.5% to 3%. This change accounts for approximately $22 million to $25 million.
Overall, the revised outlook for the fourth quarter includes the following: revenue of $1.88 billion to $2.02 billion, adjusted EBITDA of $182 million to $202 million, and adjusted EPS of $0.44 to $0.54. Also, same-contract growth for Physician Services was modified to 2% to 3% from the previous assumption of 3% to 4%.
In a year’s time, the stock has lost 60%, significantly underperforming the industry’s decline of 3%. The continued deceleration of health sector utilization will keep business volumes under pressure in the coming quarters. We thus do not expect any breather for the stock anytime soon.
Zacks Rank and Stocks to Consider.
Envision Healthcare carries a Zacks Rank #4 (Sell). Some of the better-ranked stocks in the same space are Amedisys Inc. (AMED - Free Report) , Chemed Corp. (CHE - Free Report) and LHC Group (LHCG - Free Report) . Each of these stock carries a Zacks Rank # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Amedisys surpassed earnings estimates in three of the trailing four quarters, resulting in an average positive surprise of 7.2%.
Chemed beat earnings estimates in three of the trailing four quarters, delivering an average positive surprise of 5.9%.
LHC Group beat earnings estimates in each of the trailing four quarters, delivering an average positive surprise of 9.4%.
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