Updated from 11:15 a.m.
The sudden exit of
finance chief is only the start of the company's troubles.
Shares of the Louisiana-based rural home health care provider dropped 7% Thursday after investors learned the company faces deep cuts in Medicare reimbursement. The news sent shares of rivals
lower as well.
"While we expected some improvements from the proposed rule changes announced in late April, the final rule issued by (Medicare) was actually more draconian," Avondale Partners analyst Derrick Dagnan wrote on Thursday. "With respect to LHCG, 2008 looks to be a difficult year. But if the company can continue to complete acquisitions and post strong organic volume growth, the initial shock of the 2008 pay cut could be overcome."
The drop came just a week after investors were mystified by the company's announcement of a major management change.
Last Wednesday, LHC said CFO Barry Stewart was leaving the company for personal reasons. Bullish analysts were blindsided by the news, since Stewart had just spent more than he made last year on LHC stock.
CRT analyst Sheryl Skolnick, who started urging investors to sell LHC's stock well before its recent plunge, wonders what the story is.
"A CFO leaving is never, ever good news," Skolnick stressed earlier this week. "And why did he buy $600,000 worth of stock just before he left? Did he know he was leaving, or was it a surprise?"
LHC didn't immediately return a call seeking comment.
Certainly, Stewart offered no clues about his sudden change of plans. In one of only two stock purchases by top LHC insiders in recent months, Stewart bought 25,000 shares of LHC stock just eight days before he resigned. Stewart was still talking about looming year-end tasks that awaited him at LHC during a quarterly conference call hosted by the company shortly before that.
Of course, that quarterly update exposed some financial woes. After warning of a shortfall the prior month, LHC on Aug. 1 officially revealed that a bad-debt charge -- taken after the company identified a weakness in its internal controls -- had slashed second-quarter profits by more than 15%.
Oppenheimer analyst Balaji Gandhi noted that the charge, coupled with some other rising costs, had "drastically" increased LHC's expenses and left the company's profits "well below" Wall Street expectations. Gandhi therefore scaled back his future projections for the company and reiterated his neutral rating on the stock despite its falling price. His firm makes a market in the company's securities.
After peaking in April above $33, LHC shares have been sliding on fears of huge Medicare cuts. The stock hit a 52-week low of $20.50 the day after Stewart's sudden exit. It hit $18.80 on Thursday.
In a bit of an understatement, BB&T Capital Markets analyst K. Newton Juhng portrayed Stewart's departure as an "ill-timed" development.
"The poor timing of Stewart's resignation relates to the finalization
of Medicare changes, which we expect to be delivered toward the end of August or post-Labor Day," Juhng wrote last week. "Considering the changes are a black box, and that the impact remains unknown, Stewart's resignation only heightens our concerns at this time."
Juhng is therefore sticking with his hold recommendation on LHC's stock. His firm makes a market in LHC's securities and hopes to secure investment banking business from the company in the future.
To be fair, Stewart has no plans to abandon LHC completely. Rather, over the next two years, he will collect $1.07 million -- more than his full-time salary -- for providing consulting services to the company.
Now, even LHC bulls wonder if some have overestimated Stewart's true value.
"We find the size of the consulting agreement and timing ... of Stewart's departure interesting," Avondale Partners analyst Dagnan wrote last week. Moreover, "while we think that Stewart is a good CFO, we are not so sure that his departure should erase 14% of the company's market cap."
Dagnan has been looking for LHC to outperform the market throughout this year. While the stock enjoyed a strong run during the first quarter, it has lost more than 40% of its value -- with Stewart still touting the shares -- since then.
"Something must be very, very wrong with us," declared Dagnan, whose firm makes a market in LHC's securities. "At this point, we believe the share price fully reflects a worst-case scenario for the potential negative impact of the Medicare ... final rule.
"Bottom line," he added, "we believe the selloff is overdone."