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Apria Hammered on Slowdown

The home health care company slashes its revenue growth estimate.



, a major provider of home health care services, has landed in a sickbed of its own.

The company saw its stock tumble 15% to a two-year low after warning of a dramatic slowdown in revenue growth and a looming shortfall in full-year earnings. It blamed three separate businesses -- durable medical equipment, infusion therapy and respiratory medications -- for the big disappointment.

Apria said that revenue growth had slowed to just 1% in the third quarter and will likely remain under pressure for the remainder of the year. As a result, the company now expects to report full-year revenue growth of no more than 3% -- roughly half its previous estimate -- and a profit of between $1.68 and $1.72 a share, instead of the $1.90 that Wall Street had been anticipating.

Even before Apria's warning, however, some experts had expressed concern about at least one of the company's troubled business lines. Specifically, they noted that the federal government could soon cut the fees it pays to companies such as Apria for dispensing respiratory drugs to Medicare patients. Moreover, they noted, the proposed cuts would come on top of sharp reductions in the amount the government pays for the respiratory medications themselves.

"In fiscal year 2005,

the Centers for Medicare and Medicaid Services reduced the drug reimbursement for respiratory drugs by roughly 85% but increased the monthly dispensing fee from $5 to $57 at the urging of the industry," said Citigroup analyst Matthew Ripperger. But a new government report, published in late September, "provides additional support to the government's claim that the $57 dispensing fee is too generous."

To be sure, Apria competitor



stands to lose the most. Ripperger estimates that every $10 reduction in dispensing fees would shave a full dime from the company's bottom line. Still, he has warned, Apria faces some exposure as well. Now, however, the company itself has slashed its outlook weeks before the government is even expected to reach a final decision on that particular issue.

Early Warning

One expert actually downgraded Apria two months ago in anticipation of bad news.

Wachovia analyst William Bonello cut the stock from market perform to underperform because he felt an earnings shortfall coming. Indeed, Bonello suggested that Apria's acquisition-related growth has been masking the company's "deteriorating base business" for more than a year. Even without Medicare cuts, he said, the company's nonacquired businesses weathered a second-quarter drop in earnings before interest, taxes, depreciation and amortization. Going forward, he predicted, the company will fall short of its profit goals and see its shares come under pressure as a result.

Bonello isn't counting on a buyer to save the company, either.

"On June 7, 2005, Apria confirmed that it had engaged Morgan Stanley to help it seek out potential buyers for the company," he reminded. But "we think it is unlikely that a financial or strategic buyer will pay even the current price (then around $35), given the low growth and limited free cash flow available to cover the cost of debt. ...

Meanwhile, we expect that EPS shortfalls and/or deteriorating returns could be catalysts for stock price depreciation."

The stock is now trading at the low end of Bonello's projected range of $26 to $30 a share.

Second Opinion

To be fair, at least one analyst favored the stock even at higher prices.

P. Jay Fortner of Cochran Caronia Securities initiated coverage of Apria just this week with an accumulate recommendation. He offered several reasons for his bullish view.

First, he said, Apria distinguishes itself by focusing on commercial accounts that present less risk -- albeit with smaller margins -- than Medicare business. Second, he said, the company has proven to be a successful consolidator in the highly-fragmented home health care market. And third, he concluded, the stock -- at $31.87 -- seemed cheap at the time.

Of course, it's even cheaper now, trading recently at $27. And it has fallen with many risks, including those acknowledged by Fortner himself, still in place.

Notably, Apria could still weather a cut in drug-dispensing fees and walk away without a suitor in the end.

In the meantime, Ripperger has voiced some concern about Apria and Lincare alike. He believes that the proposed Medicare cuts will continue to weigh on both of the stocks going forward.

"Given the likely cut in this segment for these companies on the horizon and the fact that this reimbursement topic remains a focal point of interest for the government, we maintain our hold ratings on both AHG and LNCR," Ripperger explained. "Though LNCR has proven adept at growing its oxygen business (not impacted by these potential cuts), we view this continual scrutiny of their business as a negative which will limit share price appreciation until it is finally resolved."

But Lincare, at least, was holding up well on Friday. After sinking at the open, the stock actually rose 39 cents to $39.85 in early afternoon trading.