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Yesterday, 9/3/09, the COO of Amedisys (AMED) left the company. Ditto the CIO. AMED tanked more than 25% on the news. It ended the day down about $10 at $34.04. The CFO did not quit. There does not appear to be anything demonstrably wrong with the company. The CEO is still there. In fact it seems the COO left because he was not going to be made CEO as quickly as he had been led to expect. In other words, he was a very disappointed, very ambitious corporate officer. The CIO's job is being split into two different jobs. Perhaps the CIO left in response to a request that she cede some of her power. Perhaps the CIO was a big supporter of the COO (and vice versa).

AMED gives every indication of a great company. It is now trading at about 7 * 2009 earnings. This seems to be a bargain. It looks even better when you see that the analysts have raised their earnings estimates for FY 2009 by more than 15% over the last 90 days. They have raised FY 2010 estimates substantially also. AMED beat earnings estimates by almost 25% last quarter. AMED has beaten estimates each of the last four quarters. Good signs about a company don’t get much better.

Why then did it tank so badly? The answer is simply that the rash actions of a couple of ambitious corporate officers made the company look as if something might be drastically wrong. Taking time for a more sanguine inspection, this does not seem to be the case. The CFO did not quit. The CEO did not quit. The company’s prospects are still great. The COO left at least partially because the CEO did not intend to leave soon, so AMED still has good continuity with both the CEO and the CFO still there (as well as everyone other than the COO and CIO).

This does not look like a company in trouble. It looks like a victim of a drastic over reaction to some unfortunate news. In all likelihood the company will go on as before. It will do great. The only question remains how to act. I say buy. Sidoti raised the company to buy this afternoon based on the new lower price. Likely a few more analysts will up their ratings of AMED today (9/4/09) based on its new lower price. This will likely cause a good push upward in price over the near term. There is overhead resistance at $36.75 and $38.08. Judging from the size of yesterday’s seemingly unfounded loss, I would expect the price to rise at least 50% from the 9/3/09 closing price. This means it should make it over the $38 mark, which is a point of good support/resistance. It may even do this Friday. See the chart below.


I actually see no reason why this stock should not return to its recent price of about $44 quickly. However, the equities markets have generally been trending down lately, so I would prefer to be conservative in my estimates. I think AMED should return to at least $38 within the next two weeks. I do not think high strung, ambitious officers are really a sign of a poorly managed company. Good luck with this trade.

Disclosure: I went long AMED yesterday.

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This article has 14 comments:

  •  
    It's tempting to jump in to this stock on the assumption that "high strung, ambitious officers" are the cause of the problem. Unfortunately there's enough doubt raised by prior questions regarding AMED's to avoid the leap.

    The steep decline in the share price due to the departures was exacerbated by seeds planted previously. A year ago (8/08) CitronResearch reported the following: "Citron has been interviewing Amedisys’s former employees in an attempt to confirm or disprove the implications of accounting red flags. The results were startling. Some points that were consistently reported by former employees:
    - Amedisys pressured employees to manipulate OASIS scores in order to increase billings.
    - Local offices would receive calls from headquarters to influence the scores on Medicare patients. (to justify higher billing).
    - The billing system is set up for failure and there are no checks and balances. "

    I wish you well on this as a short term play, but this company's accounting (and the questionable history of at least one corporate officer) makes many investors distinctly uncomfortable.
    Sep 04 09:10 AM | Link | Reply
  •  
    I haven't seen any upgrades yet this morning, but AMED is already highly rated. It may be that no one thought they had to change their opinion, which was already high. I do still expect to see an upgrade or two in the next couple of days.

    Good news today on AMED. The compnay re-affirmed its 2009 guidance. AMED expects revenues of $1.48B=$1.5B. It expects FY 2009 EPS of $4.75-$4.90 per share.

    This re-affirmation should buoy the stock. It is already up about $1.50 this morning. I expect it will rise further within the next two weeks (perhaps more today). Since the sell off was based in large part on a suspicion of possible problems (indicated by the COO and CIO leaving), this should go a long way toward alleviating that suspicion. It should help the stock rise.
    Sep 04 09:11 AM | Link | Reply
  •  
    AMED has 28% short interest. When the short sellers take profits, it should set up a short squeeze to the high side. Since there does not appear to be anything demonstrably wrong with the company, the short sellers should take profits soon. I certainly would. It is a great opportunity for a short seller.
    Sep 04 09:53 AM | Link | Reply
  •  
    Respirate: There always seem to be accusations such as the ones you are talking about against a lot of high flying stocks. Also AMED growth has been slowing. I have no doubt the issue you have mentioned accounts for a lot of the short interest. Still no accounting officers left the company. Rather the COO left because he was not being made CEO quickly enough. This hardly indicates an accounting scam.

    The company would likely not have re-iterated its guidance today if there were big doubts about its books. It must feel it can substantiate it accounting actions. Otherwise it is just giving shareholder lawsuits extra ammunition. That would be foolish. If officers were perpetrating the scheme you suggest, they would likely not be that foolish. They still have a large interest in the company and its stock. Still there has been some insider selling of late.

    You also have to consider that there is probably a limited downside to the stock. The shorters have reaped a quick coup in the last day or two. It seems foolish to me to try for a lot more. It makes more sense to take profits. With the large amount of short interest, this is likely to create a short squeeze.
    Sep 04 10:08 AM | Link | Reply
  •  
    Respirate: The fact that analysts have raised their EPS estimates by 15+% in the last 90 days speaks volumes for how serious they think the accounting problems are. I have seen other stock get completely hammered by analysts when there was even a small suspicion of accounting malfeasance. I am inclined to believe you are one of the shorters who is trying to get a little more mileage out of thsi unfortunate situation. Good luck. Being too greedy kills profits.
    Sep 04 10:12 AM | Link | Reply
  •  
    A few other statistics on AMED are:
    P/CF = 6.97
    P/B = 1.47
    P/S =0.68
    Total Debt/Total Capital (MRQ) = 27.33% (industry avg. = 47.48%)
    Gross Margin (TTM) = 52.47%
    Net Margin (TTM) = 8.11%

    This all seems fairly healthy to me. Simply booking sales ahead of time would not create the above kind of overall figures. It would not appreciably alter the P/B. It would not appreciably alter the Debt/Capital ratio. I am more convinced than ever that you are simply dispensing information biased to your stock position (short). Others should be aware of this.
    Sep 04 10:27 AM | Link | Reply
  •  
    The Put/Call Open Interest on AMED is only 0.69 today. The Put/Call Volume is only 0.42 today. The smart money obviously does not think AMED is going drastically lower from here. The smart money thinks AMED will rise. The smart money is correct much more often than not.
    Sep 04 10:34 AM | Link | Reply
  •  
    The AMED CEO and CFO will present at the Robert W. Baird & Co. Healthcare Conference on Spet. 9. This presentation should help to reassure investors. As such, it should help the stock price go up.
    Sep 04 10:49 AM | Link | Reply
  •  
    David - Thank you for the numbers on Amedisys, which are very favorable for the company. I also commend you for bringing the situation to readers' attention. I was merely sharing my concern as an individual investor. Your guess that I have a short position in the stock is incorrect.

    The fact that analysts have raised earnings guidance is somewhat irrelevant, as so many of them simply echo words from the companies they cover. Agree that the 9/7 presentation could bump the share price.

    I hope you do very well with it. I don't trust management at Amedisys and will pass. Thanks again.

    -- R No current AMED pos'n.
    Sep 04 11:42 AM | Link | Reply
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    Respirate: Good of you to clarify your position. Also good of you to provide input. However, I do disagree with you about the analysts, especially when there are accounting irregularities suspected. Usually in that case the analysts will gauge their estimates to the bottom of the company's range (or below it). This does not seem to be the case here. Also the analysts will downgrade the company both in rating and in 1 year target price. AMED has an average analyst rating of 2.1 (Yahoo Finance). This is very atypical of a company that is actively suspected of accounting irregularities. Usually the analysts are quick to jump on this bandwagon. They usually say that the mere suspicion will be enough to hold back the stock price for several quarters. That does not seem to be the case here. This stock is still a "buy" to most analysts. This means they have little to no suspicion of wrong doing on the part of AMED's accounting. I have to go with that. I have seen stocks that are actively suspected of wrong doing. They do get down graded (quickly). They do tank. This is a case of a highly placed officer (and likely one of his cronies) leaving the company. The event has triggered the suspicion of wrong doing among investors. It does not seem to have done so among analysts. Eventually the investors will have their fears calmed. The stock price will go back up. When virtually no analysts are jumping on the suspicion bandwagon, you can usually be fairly sure that the bandwagon is going no where fast. The Put/Call Open Interest (0.69) number is also a good indicator. Clearly more people believe the stock is going up than down.

    By contrast GS has a P/C ratio of 1.35. AMZN has a P/C ratio of 1.10. It looks to me like shorters are trying to drive the price down. They are finding no believers among the analysts or among the most savvy investors. I have found no evidence to make me think anything is wrong. This stock should go up from here. It just may take a little while for investors to regain their confidence in it.
    Sep 04 12:09 PM | Link | Reply
  •  
    David, you make excellent, very convincing points, and I'll take another honest look at AMED. The easy money ($30 to $34) has already been made since yesterday's initial knee-jerk reaction to the news.

    It may be good for the longer term, until "investors regain their confidence". Some analysts opine that it was due for a pullback in light of the price nearly doubling from Mar09 lows, a powerful move for a company in this sector. Uncertainty regarding future Medicare reimbursement rates (also the basis for insurer rates) may also hold it back for a time. Still, this may be an attractive entry point.

    Thanks again for the good information. -- R
    Sep 04 12:43 PM | Link | Reply
  •  
    Outstanding debate gentlemen! This is what it's all about. Nice work to both of you.

    Justin M. Hall
    Sep 05 12:27 AM | Link | Reply
  •  
    Top-flight investment. Got in quickly. Long.
    Sep 05 01:05 AM | Link | Reply
  •  
    ...an old and, perhaps, wise saying: "The first bad news is never the last."...
    Sep 05 12:13 PM | Link | Reply