What: Shares of Kindred Healthcare (NYSE:KND), a healthcare services company providing hospital, nursing, rehabilitation, and long-term care within the United States, crashed to Earth Thursday morning. Kindred's stock tumbled almost 22% following weaker-than-expected third-quarter earnings results released after the closing bell last night.
So what: For the quarter, Kindred Healthcare announced revenue of $1.76 billion, a 43.6% increase over the prior-year period that was primarily reflective of its acquisitions of Gentiva Health Services and Centerre Healthcare. Core diluted earnings per share came in at $0.23, a sizable jump from the $0.13 in core EPS reported in Q3 2014. Aside from the recognition of new revenue from its acquired businesses, revenue growth of nearly 9% in its rehabilitation services division packed most of the punch.
However, as you can probably surmise by today's share price decline, not everything went as planned. On a comparative basis, Wall Street was expecting core EPS of $0.25 per share from Kindred, resulting in a $0.02 per share miss. Kindred blamed this weakness on its hospital division where revenue declined 1.4% in Q3, admissions sank 3.8%, labor expenses rose, and average length of patient stays increased, resulting in a correlative increase in bad and uncollected debts.
Furthermore, Kindred Healthcare lowered its full-year outlook. The company had previously forecast $7.2 billion in full-year revenue and adjusted core EPS of $1.70 to $1.90. Its new forecast calls for $7.1 billion in revenue (reflecting its hospital division struggles), and $1.55 to $1.70 in adjusted core EPS.
Now what: As you can see, there were plenty of reasons for investors to run for the hills this morning. The big question is whether or not the drop in Kindred's share price has created a potential buying opportunity for investors. To that end I believe it may have, but it really depends on your investment timeline.
Over the short- and intermediate-term Kindred will continue to work through its adverse hospital division concerns and deal with costs associated with integrating Gentiva and Centerre. It's possible that additional earnings misses could be on the horizon.
However, over the long run the need for healthcare services is only expected to increase. If Kindred can indeed use its acquisitions to reduce its expenses and boost cash flow, then it's not out of the question that it could generate $2 in EPS for the full-year by as soon as 2018 to 2020. That would make the company's current valuation quite attractive. Understandably there are a lot of variables at work here that need to push in Kindred's favor, but I would certainly suggest that healthcare-savvy long-term investors get this company on their radar and consider digging a bit deeper.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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