Apria ( AHG), 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 Lincare ( LNCR) 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.
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.