Kindred Healthcare Plunges On Lowered Forecast

October 22, 2008

October 22, 2008
On yet another bad day on Wall Street, Kindred Healthcare "preannounced" some preliminary third quarter earnings numbers, and it wasn't good news. The major culprit was the long-term acute care hospital division, with shorter lengths of stay expected to contribute to a 21% drop in operating income compared with the third quarter in 2007. In addition, the Gulf hurricanes negatively impacted operations in Texas and Louisiana. The bottom line is that third quarter net income per share from continuing operations will be only $0.01 to $0.03, compared with previous estimates of $0.20 to $0.25 per share. The share price plunged by more than 33% and hit a new low of $13.69 per share.

Most people thought Kindred was a buy anywhere near $20 per share, so at its current levels, it should look good despite the overall market condition. Obviously, the company needs to improve the financial performance of the LTAC division, but as unemployment increases, more people will lose their insurance benefits, and the commercial business is the highest margin part of Kindred's LTAC division. The other potential problem the company could face, as will all skilled nursing providers, is a freeze on Medicaid reimbursement as most every state will be operating in the red next year and looking for ways to cut expenses. The Boren Amendment will certainly be missed.

The skilled nursing sector fared better than Kindred and the rest of the market, with just small price declines today. The one exception was Advocat, which dropped 15% and almost hit its recently established low of $2.86 per share. In the seniors housing sector, most of the stocks mirrored the overall market with the exception of Emeritus Assisted Living, which dropped by 9% and hit a new low of $11.06 per share on no news. I know that Warren Buffet believes the market is too cheap right now, but we've got to believe others think the seniors housing sector is completely oversold by now. The question is, where are they?


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