Envision Healthcare Corp. has lately fallen out of investors’ favor due a number of factors working against it. These include low patient volumes, increased leverage, high operating expense and a weak operating environment.
The company’s bleak outlook is evident from its dismal stock performance and recent fall in estimates. Further, the company now has a Zacks Rank #5 (Strong Sell).
Stock Continues to Decline
Shares of Envision Healthcare have plunged 47% year to date, against the industry’s decline of 2.5%.
Estimates Trend Down on Bleak View
Following the dismal quarter, the company provided a bleak view for 2017, which led to a downtrend in estimates.
The Zacks Consensus Estimate moved south in the last 60 days. Notably, the Zacks Consensus Estimate for 2017 has declined 19% to $2.72 per share. The same for 2018 has moved down 22% to $3.06 per share.
Weak Guidance: For 2017, the company lowered its adjusted EBIDTA guidance. The guidance calls for EBIDTA of $922 million, down from the previous guidance of $1.02 billion to $1.04 billion. This reduction is attributable to downward revision in same contracts and met the new contract outlook in the Physician Services segment. This is the third time this year that the company has cut its guidance. This raises a question on the company’s ability to perform, thus raising skepticism among investors.
Challenges in Physicians Services segment: The unit that generates most of the company’s revenues carries a weak outlook for 2017. An expected decline in same contract outlook and net new contract revenues will weigh down the segment’s revenues. Same Contract assumptions were driven by lower-than-expected seasonal anesthesia rate increases from the first half of 2017 to the second half. Lower-than-expected emergency department rate increase, net volume growth and higher labor and other supportive costs will keep the segment’s earnings under pressure.
Increasing Debt: The company’s total debt has been increasing for the past many years. As of Dec 31, 2016, the company had total debt of approximately $5.79 billion, 145.6% higher year over year. For the first nine months, the same increased 8.4% from end 2016. The rise in leverage has consequently led to a spike in interest expense from $17 million in 2012 to $142.4 million in 2016. The same for the first nine months of 2017 increased 77% year over year. Envision's debt is about 6.8 times EBITDA, which is above 3 to 4 times EBITDA that the company feels comfortable at. Such high debt levels increase leverage risk and increasing interest costs may dent the company’s margins.
High Operating Expense: 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 higher than the revenue growth rate. To be specific, operating expense increased at an average of 54% from 2012-2016 while revenues grew at an average of 43.4% during the same time frame. The same trend was seen in the first nine months of 2017, with expense rising 183.4%, surpassing revenue growth of 152%. This increase in expense has put pressure on the bottom line and will continue to do so in the coming quarters.
Though the company has undertaken a strategic review of a broad range of alternatives to enhance shareholder value, the stock will remain on the sidelines until the results show sustained profitability.
Forget Envision Healthcare, Check These Healthcare Stocks
Some better-ranked stocks in the healthcare space are Amedisys Inc. (AMED - Free Report) , Chemed Corp. (CHE - Free Report) , and Centene Corp. (CNC - Free Report) . 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 the Zacks Consensus Estimate in each of the last four reported quarters, with an average positive surprise of 13.1%.
Chemed Corp. surpassed estimates in three of the last four reported quarters, with an average positive surprise of 5.9%.
Centene Corp. gave positive surprises in each of the last four quarters, with an average of 10.6%.
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