Amedisys: Attractively Valued and Breaking Out

 |  Includes: AFAM, AMED
by: Kevin Mulhern

Home healthcare and nursing services provider Amedisys (NASDAQ:AMED) saw a 9.38% pop yesterday on more than double the average volume. So, is this a great exit point or should you be accumulating AMED? A look at the 5-yr chart indicates that AMED may be breaking out of an extended consolidation triangle and penetrating a downtrend line reaching back to the summer of 2008.

Just looking at some preliminary numbers, we'd put a target price range between $55-60 and that range could be hit relatively quickly. The volume action in the name is very attractive over the past couple of days as it has spiked.

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Its hard not to love the fundamentals behind this story and we consider it one of the most compelling valuation stories in a market that is overvalued. First, the home nursing and healthcare sector is and will remain a growth story for most of the next decade, regardless of the economic circumstances that play out in the U.S. The demographic tidal wave of retirees will happen even with disappointing GDP growth numbers. Yet within the nursing space, AMED trades at a significant discount to its peers such as Almost Family (NASDAQ:AFAM) which has gained nearly 600% compared to AMED's 70% over the previous 5 years.

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Additionally, while AFAM trades at 14.45 LTM earnings and 14.1 forward earnings, AMED trades at only 9.8 LTM and 8.8 forward earnings with a 0.5 PEG. These valuations are especially attractive considering the expanding growth rate of the company. AMED's revenue growth was 60% in 2004, 68% in 2005, 41.8% in 2006, 30% in 2007, and in the midst of recession last year they grew their revenues at 70%. While Q3 revenue grew 20.1% yoy, the stock traded at $50 in the fall of last year. The closing price today was $44.43. The magnitude of the secular growth story simply isn't being priced in at current levels.

AMED has been in a consolidation pattern over the past 3 months, mainly because of a qoq drop in revenue from in Q3. Despite this disappointment, the company did pay down most of its debt in Q3 and still increased EPS from 1.27 to 1.29. The churning has provided a great entry opportunity and we now have what appears to be a significant technical catalyst with the break out.

Disclosure: Author owns a position in AMED