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Why Healthcare Services Group Stock Fell Sick Today

By Evan Niu, CFA - Aug 11, 2020 at 5:39PM

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The healthcare services provider's biggest customer is facing a cash crunch, prompting an analyst downgrade.

What happened

Shares of Healthcare Services Group (HCSG 2.70%) were feeling under the weather today, closing down 17% after the stock received a downgrade from Wall Street. Credit Suisse cut its rating from outperform to neutral.

So what

Analyst A.J. Rice also assigned a $31 share-price target on the company, which provides, uh, healthcare services. Genesis Healthcare (GEN 2.50%) is Healthcare Services Group's largest customer and reported second-quarter results yesterday. Genesis warned that it is facing a cash crunch due to the COVID-19 pandemic and that a recent assessment of its liquidity "raise[s] substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued."

A nurse making up a hospital bed

Image source: Getty Images.

A "going concern" is an accounting term that refers to a company that is able to sustain itself financially. Genesis continues to seek government assistance under provisions of the CARES Act, as its operations are geographically concentrated in regions of the U.S. that have been hit particularly hard by the pandemic.

Now what

Genesis represented approximately 16% of Healthcare Services Group's consolidated revenue in 2019, according to the latter's annual report, down from 19% in 2018. Rice believes that Genesis Healthcare's current predicament could adversely impact Healthcare Services Group's housekeeping and dietary operating segments, which is why the analyst is recommending that investors take a cautious approach. Genesis will likely have to either secure more government funding or pursue some form of financial restructuring, in the analyst's view.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Healthcare Services Group. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Healthcare Services Group, Inc. Stock Quote
Healthcare Services Group, Inc.
$14.84 (2.70%) $0.39
Genesis Healthcare, Inc. Stock Quote
Genesis Healthcare, Inc.
$0.00 (2.50%) $0.00

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