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Published: May 24, 2010
Among the biggest winners in Monday's early
trading are Gentiva Health (Nasdaq: GTIV), Sprint
Nextel (NYSE: S), and Silvercorp Metals (NYSE: SVM).
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A Win-Win M&A Deal for Gentiva
It’s an unwritten rule on Wall Street that a company’s stock
will lose roughly the same value as its
buyout target gains when a buyout deal is announced. Yet
shares of Gentiva Health (Nasdaq: GTIV) are up more than
+12% after the home health services company agreed to acquire
Odyssey Health (Nasdaq: ODSY), which provides hospice care.
The deal comes at a curious time: Uncle Sam is closely
scrutinizing billing practices by firms that provide home-based
health care, and many suspect that cost containment pressures
will cause reimbursement rates in this area to fall. In fact,
Gentiva had been expected to post a drop in profits next year as
rates drop. Yet investors are betting that the long-term aging
of our population will be a powerful macro tailwind for the
group, as many senior citizens are opting to live out their
years at home rather than in senior care facilities.
The deal is also appealing as it should boost profits for
Gentiva fairly quickly, even after accounting for the planned
$1.1 billion in increased debt being raised to pay for the deal.
The combined entity should generate roughly $1.8 billion in
annual sales, and have roughly 6% of the hospice market, second
only to privately-held Vitas. A key consideration will be the
interest rate that Gentiva will need to pay on that new
debt. If bonds are priced at junk levels, then the
interest expense could eat up most of the anticipated
savings.
Lastly, shares of Tenet Healthcare (NYSE: THC) are
gaining +5% on Monday as investors seek other plays in this
consolidating industry. But Tenet carries more than $4 billion
in debt, and would probably be a difficult acquisition to
swallow.
Action to Take --> Likely
pressure on reimbursement rates will be offset by favorable
demographic trends for Gentiva Health. Netting it out, this is a
low-growth business that appears fully-valued after today’s
double-digit gain.
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Sprint Nextel Higher on Analyst Commentary
Shares of Sprint Nextel (NYSE: S) are up more than +8% to
around $4.80 on the heels of positive analyst commentary. Sprint
has badly trailed its wireless rivals in terms of customer
satisfaction and organic growth. In the face of declining
market share and ample capacity on its wireless network,
Sprint decided to enter into the cut-throat prepaid wireless
market, and is also backing Clearwire (Nasdaq: CLWR),
which aims to conquer the high-speed 4G wireless network.
Analysts have become increasingly positive on the stock, noting
that recent trends indicate that management’s plans are starting
to pay off. Goldman Sachs (NYSE: GS) boosted its target
price from $3.50 to $6, citing an expected drop in the number of
defecting subscribers, known as churn. And with more customers
staying in the fold, that should boost Sprint’s
earnings before interest, tax, depreciation and amortization
(EBITDA) to around $6.2 billion by 2012. That’s a gutsy
call. Right now, EBITDA continues to fall, from $7.7 billion in
2008 to $6.4 billion last year to an expected $5.8 billion this
year.
Investors need to be on the lookout for eventual price wars in
the wireless space. If Sprint Nextel is able to lower its churn
rate and actually pick up some market share thanks to that 4G
push, then rivals like Verizon Wireless (NYSE: VZ) will
look to be more competitive on price. And that’s bad news for
everyone except the consumer. In addition, Google (Nasdaq:
GOOG) is trying to upend the entire wireless
business model with its Android phones by ending long-term
contracts, and possibly looking to secure lower-cost Wi-Fi style
bandwidth. The industry has been roiled by Google comments in
the past that consumers pay too much for their wireless
services.
Action to Take -->
Analysts are correct in noting that Sprint Nextel appears fairly
cheap in relation to its EBITDA generating capabilities. But
this is a brutal business, and any gains in the past for Sprint
Nextel have been met by profit-sapping competitive responses.
Today’s spike in the stock may not last, and you may be able to
pick up shares more cheaply down the road once those competitive
factors again come into play.
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Stronger Silver Prices boost Silvercorp
The recent economic concerns that have been weighing on the
market have also pressured prices for silver - which is seen as
both an industrial
commodity as well as an
inflation hedge. Silver fetched nearly $20 an ounce two
weeks ago, but has lost more than -10% of its value since then.
With the market stabilizing on Monday, silver prices appear to
be on the mend. And that’s pushing up shares of Silvercorp
Metals (NYSE: SVM) and Silver Wheaton (NYSE: SLW)
higher by +8%, and +4%, respectively.
Both firms have reputations as low-cost producers and should
boost profits on the back of rising silver prices -- if the
global economy doesn’t lose its moorings.
Action to Take -->
Although gold and gold stocks dominate the precious metals
headlines, the silver stocks also have plenty of luster.
-- David Sterman
Contributor
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