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Will High Costs Dent Envision Healthcare (EVHC) Q3 Earnings?

Envision Healthcare Corp. EVHC is scheduled to report third-quarter 2017 results on Oct 31, after market close.

Last quarter, this health services company outperformed the Zacks Consensus Estimate by 3.7%. However, earnings declined year over year due to an increase in expense, which outdid revenue growth.

The company does not have an impressive surprise history. Though it missed estimates in only one the last four quarters, the average is a negative earnings surprise of 0.7%. This is depicted in the graph below:

Q3 Flashback

The company is likely to see lower revenues from its Ambulatory Services segment, which experienced soft business volumes in the past few quarters.

Moreover, the company is reeling under escalating operating expenses for several quarters, due to higher salaries and benefits expenses. Most alarming is the rate of increase in operating expense, which has overshadowed the revenue growth rate, thereby thwarting bottom-line growth. The same is expected to be seen in the to-be-reported quarter.

A huge debt load is also niggling Envision Healthcare. Its total debt has been swelling since 2013, leading to a spike in interest expense. This, in turn, will dent its operating margins.

The quarter is likely to see increased interest expense as a result of increased borrowings related to the merger and incremental term-loan borrowings to fund recent acquisitions.

We, nevertheless, expect to see an increase in revenues from the company's Physician Services segment (which contributes nearly 84% of the company’s revenues), driven by synergy from recent acquisitions as well as organic growth. Revenue growth is expected to come from higher patient volumes as well as improved pricing. We also expect to see improved EBIDTA which must have benefited from merger-related synergies.

The company’s Ambulatory service segment will likely report a decline in revenues due to disposal of centers.

Earnings Whispers

Our proven model does not conclusively show that Envision Healthcare is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below.

Zacks ESP: Envision Healthcare has an Earnings ESP of -10.98%. This is because the Most Accurate estimate of 78 cents per share is below the Zacks Consensus Estimate of 88 cents. You can uncover the best stocks to buy or sell before they’re reported with our">Earnings ESP Filter.

Zacks Rank: Envision Healthcare carries a Zacks Rank #5 (Strong Sell). We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies from the health care sector that you may want to consider as these have the right combination of elements to beat on earnings in the third quarter.

Aetna, Inc. AET is set to report results on Oct 31. It has an Earnings ESP of +1.68% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Teladoc Inc. TDOC has an Earnings ESP of +15.65% and a Zacks Rank #3. The company’s earnings release is slated for Nov 1.

Humana, Inc. HUM has an Earnings ESP of +0.43% and a Zacks Rank #3. The company is set to report results on Nov 8.

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