Monday Winners: Gentiva Health, Sprint Nextel and SilverCorp Metals

Among the biggest winners in Monday’s early trading are Gentiva Health (Nasdaq: GTIV), Sprint Nextel (NYSE: S), and Silvercorp Metals (NYSE: SVM).

Top Percentage Gainers — Monday, May 24, 2010
Company Name (Ticker) Intra-Day Price Intra-Day
% Gain
52-Week High 52-Week Low
Gentiva Health
(Nasdaq: GTIV)
$28.95 +12.2% $30.88 $14.50
Sprint Nextel (NYSE: S) $4.80 +8.8% $5.78 $2.78
SilverCorp Metals
$7.21 +8.3% $9.05 $7.24
*Table includes companies with minimum market capitalizations of $200 million and three month trading volumes of at least 100,000 shares. All percentage returns are listed as of 12:00PM Eastern Standard Time. Click on ticker symbols for up-to-the-minute price quotes and percentage gain data.

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.

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.

#-ad_banner-#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 roi 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.

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.