By Jake King
Amedisys, Inc. (AMED) reported Q4 and year-end earnings Tuesday morning, and the key highlight was the company's 2013 EPS guidance range of $0.60-$0.70, substantially below the Street's $0.77 estimate. Analysts EPS estimates were lowered when the company reported its third-quarter 2012 earnings miss (2013 EPS forecasts back then called for $0.93 a share). Hence, the business continues to deteriorate and the earnings trough has not yet been reached.
Interestingly, analysts have revised forward EPS down three times since October, so it's worth questioning if the Street really understands what's happening here. The EPS guidance may serve as a wake-up call and is consistent with our thesis and prior articles, including our thoughts that EPS for 2013 would be right in this range (see here and here). Amedysis remains under pressure from sequestration, Medicare "rebasing," and other pricing pressures, and investigation by a number of regulatory bodies bring additional risk to the story and potential for steep fines. Importantly, financials reported in Q4 show AMED's sales, margins, and earnings per share all in decline; a business like this should trade at a discounted multiple, not a premium.
Here are some details from the company's press release.
- Net service revenue of $362.9 million compared to $370.3 million in 2011, a decrease of $7.4 million or 2.0%.
- Net income from continuing operations attributable to Amedisys of $7.2 million compared to $14.5 million in 2011, a decrease of 50.5%.
- Net income from continuing operations attributable to Amedisys per diluted share of $0.23 compared to $0.49 per diluted share in 2011, a decrease of 53.1%.
- Earnings before interest, taxes, depreciation and amortization attributable to continuing operations (EBITDA) of $23.3 million compared to $35.9 million in 2011, a decrease of 35.1%.
Ironically, we note that even after the share price decline on Tuesday, AMED still trades at 17 times the midpoint of the company's 2013 guidance range, or $0.65. Even if one applies a generous 10x multiple to these declining EPS expectations, this indicates that the stock should trade in the $6-$7 range. As a result, shares of AMED still have a long way to fall, and we suggest shareholders sell the stock and look to re-enter at a much lower valuation.
Should the bull market turn sour, companies with vulnerable businesses and high valuations like AMED are the first stocks that short-sellers turn to in order to protect portfolios on the downside. Expect negative analyst notes and downward earnings revisions to pressure shares of AMED further in the short run. Technically, a breakdown below $9.50 is the gateway to our $6-$7 valuation estimate. Upside risk for shorts seems minimal, with significant resistance at the $12.25 level.
Despite lowered estimates, new guidance still falls short. Last year, analysts lowered their earnings estimates following disappointing Q3 2012 results from Amedisys, nevertheless, projections still remained too optimistic. The consensus revenue estimate for Q4 2012 of $372.4 million going into Tuesday's earnings release overestimated the company's reported $362.9 million. This is interesting, as analysts had been lowering estimates on a continuous basis since the third-quarter 2012 earnings report (see here); still more revisions need to take place.
According to Yahoo Finance, the average of analyst estimates for 2013 EPS calls for $0.77 (revised down from $0.93 since last October), yet Amedisys has now guided for EPS this year of between $0.60 and $0.70. As a result, analysts are likely to begin adjusting EPS estimates downward and are also likely to bring down price targets; shares will react as revisions or downgrades materialize. It's hard to see the upside in this stock given the financial picture over the last several quarters, but there is the chance, of course, that after a tough period Amedisys is guiding down significantly in hopes of a full-year EPS beat. Regardless, these slashed numbers, even at the high end, don't support AMED's current share price, as we discuss below.
Valuation is unjustifiable; AMED to correct while investors wait for any signs of a turnaround. With the three major public home health providers all missing earnings and providing disappointing guidance, it remains clear that the macro environment for companies like AMED is under pressure. Perhaps the business will bottom at some point, but so far there is no evidence that the earnings trough has been reached. So while investors wait for earnings to find their bottom and begin to grow again, shares of AMED are expected to remain weak. And certainly the company's P/E multiple of 17 times 2013 earnings guidance (midpoint of the company's range) is a huge price to pay for the hope that this business is finally going to turn around.
As a result, we expect AMED shares to fall to a more reasonable level, with typical P/E multiples for "in decline" healthcare companies of about 8x forward earnings estimates. To be conservative, even using a generous 10x multiple on the midpoint of the company's 2013 guidance range, this calculation suggests that AMED should trade down to the $6-$7 range. At that point, perhaps, the stock becomes interesting from a turnaround perspective. With the industry trends continuing to be "challenging" in the company's own words, seeing AMED slide into the single-digit range would be unsurprising.
Business remains an uphill battle for AMED. In July 2013, the Centers for Medicare and Medicaid Services (CMS) will release details about its four-year reimbursement rate "rebasing," as mandated by ongoing healthcare reform. Analysts expect the changes will result in annual rate cuts from 2014-17, and while the size of the upcoming rebasing is still unclear, this uncertainty adds additional risk to the AMED story. Of course, clarity on this issue will give investors an idea of the material impact to earnings over the coming years, but in the last two years, home healthcare providers absorbed reimbursement declines of 11.5%; Amedisys' margins declined on a 4% Medicare cut last year.
Notably, Medicare reimbursement accounts for roughly 82% of AMED's business. That's a huge portion with obvious consequences, and there's little doubt that CMS changes will impact the bottom line. Management noted on Tuesday's conference call that the Medicare cuts to home health could be anywhere from 1% to 3%. On top of that, sequestration cuts will reduce Medicare reimbursement by 2% across the board.
The restructured deal with Humana (HUM), the company's largest relationship in the managed care segment, now means that Amedisys gets reimbursed on a "per visit" basis, rather than on an "episodic" basis. AMED expects that the new HUM contract will result in half of the revenues that it was previously receiving under this agreement, which also encompasses fewer markets, so AMED is losing market share. These pressures were apparent in management's comments on its Q4 earnings call and play a role in the 2013 guidance, as we expected.
Ironically, because the company has been significantly cutting costs (including sizable staff reductions) to offset earnings headwinds, there have been impacts to the revenue side of the business. The layoffs and stricter care guidelines have reduced billable care per patient, and according to management, the cost reductions may have swung too far. Notably, Amedisys' recertification rate is down to roughly 20%, as noted on Tuesday's conference call. Recertification increases the number of visits per patient, so this negative trend is costing AMED important business, and analysts are likely to write about this factor.
Finally, AMED continues to be the subject of several investigations with regards to billing practices. Currently, there are open investigations on the company by CMS, the Office of the Inspector General (OIG), the SEC, and the Department of Justice (DoJ). The DoJ investigation involves documents and information relating to AMED's business operations, including reimbursement and billing claims.
For now, these are overhanging risks that should further contract AMED's P/E multiple. Forward EPS of 17x is simply unsustainable, particularly given the business outlook and risks. We see fair value for AMED in the mid-single digits.
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