Amedisys: Buying out the Competition

Jan.18.09 | About: AMEDISYS Inc (AMED)

Amedisys, Inc. (NASDAQ:AMED) has been knocked around by news quite a bit. In November, the company re-affirmed guidance for 2008 and received a 16% haircut in just one day. Conversely, when the company released guidance for 2009 in January, the stock rebounded 16% as investors cheered the expected growth. Still, with all of the theatrics, the stock remains in a wide range that has held it for the last 12 months. I’m going to explain why I think this stock will show investors significant gains in 2009, and why it is a strong candidate for the ZachStocks Growth Model. But first a bit about the company.

Amedisys owns 325 nursing offices and 29 hospice offices across the United States. The company has strong internal growth, but is best known for its acquisition strategies. In March of 2008, the company paid $395 million for TLC Healthcare Services. The acquisition was the largest for the company in the past several quarters, but certainly not the only one.

Management has proved adept at targeting competing companies that may be run less efficiently and then rolling them into better operating procedures. It looks like the TLC acquisition is coming along nicely as operating margins for the acquired locations are quickly moving from an average of 22% towards standard 33% margins for AMED. According to Raymond James, this should equate to an additional $40 million in operating profit. The analyst says that this acquisition should add $1.50 per share to 2010 earnings compared to initial figures of $0.40 when the deal was first announced.

Looking to the year ahead, management has stated that they have a robust pipeline of future acquisitions in place. With the industry concerned about the future of Medicare expense reimbursements, there may be some deals that are done at very attractive prices as current owners want to get out quickly. For what it's worth, company guidance of $4.10 to $4.30 in earnings this year do not include the benefit from any un-announced acquisitions. So these figures could turn out to be quite conservative.

Amedisys owes some of its success to strong relationships with local physicians. It turns out that the company receives a much higher percentage of its patients from individual physician referrals as opposed to hospital referrals. Typically physician referrals are more acute patients that generate higher revenue. Now it sounds a bit callous to refer to patients in terms of revenue, but it is comforting to know that Amedisys is providing quality care to the individuals who need it most.

One of the reasons the stock is trading at such a low multiple (roughly 11 times 2009 expectations) is due to concern with the company’s uncollected bills (as measured by Days Sales Outstanding or DSOs). It is certainly a concern if the company is not able to collect on services performed, but it appears that progress is being made. The company most recently reported that DSO’s were declining, and pointed to the fact that they have been able to collect 98% of billings over the past several years, and 99.5% of all Medicare revenue.

So with the possibility (or more accurately the probability) of the company completing accretive acquisitions, and the low price for which this company is trading, I expect investors to experience healthy returns for 2009. Nursing care is a needed service and Amedisys is in the position of providing valuable care. The growth rate could slow from a hefty 45% earnings growth seen over the last 2 quarters, but even with a modest 20% growth rate, the stock appears under-valued.

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AMED Notes

Disclosure: Author does not have a position in AMED.