Gentiva Health Services GTIV W
August 15, 2001 - 11:19am EST by
armand440
2001 2002
Price: 17.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 420 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Description

Gentiva (GTIV; $17.50) was formed on March 15, 2000 when Olsten Corporation's healthcare operations were spun off to Olsten's shareholders (Olsten was then acquired by Adecco). Gentiva currently has two lines of business: (1) home nursing and (2) specialty pharmaceutical distribution and services.

The home nursing business (which will have revenues of about $625million this year) provides nurses to the residences of patients who recently have been released from hospitals or who otherwise need continuing care. This should be a rapidly growing business because, in an era where healthcare providers are pressed to reduce costs, the median costs for home care are roughly $100 per day vs. $400 per day in skilled nursing homes and $2,000 in hospitals. Gentiva is the largest provider of home nursing services. A publicly traded competitor is Apria.

Gentiva's second business (which will have revenues of about $800 million this year) provides pharmaceuticals that must be administered intravenously or otherwise are difficult to administer. Gentiva not only distributes the pharmaceuticals but also provides substantial support services, including instructions, hot lines, and, in some cases, trained professionals to administer the drugs. This pharmaceutical business should grow at a high rate, partially because most of the new bio-technology drugs consist of large molecules that must be administered intravenously. Gentiva is one of the leading distributors of specialty pharmaceuticals. Two publicly traded competitors are Priority Healthcare and Acredo.

Gentiva currently is under-earning, largely because the previous management failed to adequately control fixed costs. A new management has been reducing costs - but, more importantly, as Gentiva's revenues grow faster than its fixed costs, pre-tax margins should expand markedly. Management's guidance is that Gentiva's cash EPS will be $1.30-1.50 this year (note - one negative is that the company's tax rate is low). We estimate that EPS will increase to $1.60-2.00 next year - and will reach the $3.00 level within several years. I note that Gentiva's three main competitors currently are selling at an average of 34X their estimated 2001 EPS.

Gentiva's finances are rock solid. Pro-forma the conversion of a convertible preferred, Gentiva will have 24.2 million shares outstanding and a hard book value of about $380 million, or roughly $15½ per share. The company has more than $50 million of cash - and no debt. Partially because the new management is in the process of reducing receivables, cash is building rapidly.

The Olsten family, which is not involved in management, remains Gentiva's largest shareholder (the family controls about 16% of the fully diluted shares) and has let it be known that its longer-term objective is the realization of shareholder values. I believe that there is a good chance that, once the company's earnings and share price rise to higher levels, Gentiva will agree to be acquired by another healthcare company (Gentiva might split into two parts before then). In the meanwhile, the shares, which largely have been ignored by Wall Street (in spite of the consideration that Gentiva is a sizable company with revenues of about $1.4 billion), should benefit once more analysts start to follow the company and once investors realize that EPS should grow rapidly as revenues are positively leveraged by fixed costs.

Catalyst

(1) Low valuation.
(2) It is anticipated that several brokerage firms will begin coverage of GTIV in the near future (no sell-side analysts currently follow the company).
(3) Possible sale of company.
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