Is This Sector on Its Deathbed?

If you thought last year was an ugly one to be a home health-care provider, look again. Shareholders of Amedisys (NAS: AMED) , Gentiva Health Services (NAS: GTIV) , LHC Group (NAS: LHCG) , and Almost Family (NAS: AFAM) would gladly welcome last year's drops if they didn't have to deal with the prospect of new Medicare regulations.

One by one, the dominoes in this sector have fallen. Yesterday, Amedisys reported a $0.36 quarterly profit, missing estimates by $0.14 and lowering its full-year guidance to $1.90-$2.00 from its previous forecast of $2.20-$2.40. As if that wasn't enough of a beating for shareholders to endure, the company also announced the resignation of its CEO, Mike Snow, and noted that it would close, consolidate, or sell 50 of its care centers.

Gentiva Health Services is scheduled to report its third-quarter results on Thursday, and from the looks of things, it could be ugly. Last quarter, Gentiva missed analysts' estimates by $0.16 and over the past three months, analysts' full-year EPS estimates for 2012 have dropped by a third. Considering it has more than $1 billion in debt, investors will be expecting a solidly profitable outlook from the company.

So is this the end of the home health-care sector? Probably not.

Based on a regulation that passed earlier this week, home health agencies will endure a 2.3% drop in Medicare payments in 2012. The cuts, which are smaller than lawmakers had talked about earlier in the year, are going to be phased in over two years and, as we've witnessed so far, do have the ability to pinch margins in the sector. However, these cuts are not likely to put any of these companies underwater for long. LHC Group is debt-free, Almost Family is practically debt-free, and Amedisys boasts 18% debt-to-equity. The only company showing any danger signs in the sector is Gentiva, which boasts a debt-to-equity ratio of 154%.

Then again, even with earnings estimates falling, this sector couldn't get much cheaper or have more risk built into it. Gentiva is currently valued at just 2.2 times forward earnings, while Amedisys is trading at just over 5 times its own 2011 guidance. Not to mention that these two companies are valued well below book value, with Amedisys at 32% and Gentiva at 17% of book value.

I would hardly go so far as to say that home health-care companies are out of the woods -- in fact, estimates could continue to deteriorate. But, I seriously doubt that Amedisys or Gentiva will present a better value to shareholders than they do right now.

Craving more info on these home health-care stocks? Start by adding them to your free and personalized watchlist to keep up on the latest news in the sector.

At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong. The Motley Fool owns shares of Almost Family. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat dishes out a dose of transparency every day.

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