Here’s PSW member Tuscadog’s detailed analysis of the company Amedisys (NASDAQ:AMED). Tuscadog feels this is one of the few solid opportunities in the stock market, and he suggests a massive short squeeze may be coming due to AMED’s 53% short interest. - Ilene
Amedisys, Inc. provides home health and hospice services to the chronic, co-morbid and aging American population. Its home health services include skilled nursing and home health aide services; physical, occupational and speech therapy; and medically oriented social work to eligible individuals who require ongoing care. The company also offers clinically focused programs for chronic conditions and various diseases,… (Yahoo financial, more here.>>)
February 23rd may be ‘Judgment Day’ for the AMED short interest.
This is a long posting based on a lot of research and high level interviews I’ve conducted. I’m a private (long term) investor in Amed and I don’t appreciate the way Amed has been "jerked around" by the hedge funds with false rumors and shorting, hence my willingness to share my analysis with small investors. These are my opinions based on my own extensive research, so invest at your own risk. For background on Amed pay particular attention to the 7 articles by Daryl Davis in the "Financial Blogs" section of the Yahoo Finance page for Amed.
Updated Guidance Will Be a Nightmare for Shorts
Amed will likely release 2009 EPS on February 23rd of around $4.90 to $5 and, more importantly, it will give guidance for 2010 based on the status quo on Medicare billing rates for 2010 (i.e. as already issued for 2010 by The Centers for Medicare & Medicaid Services, CMS). Based on the company’s growth rates and CMS’s announced approved rate increase for 2010 (which translates into a 1.8% net increase for 2010 after two flat pricing years) Amed will likely provide 2010 guidance in the $5.60 to $5.70 range. I believe actual results outcome will likely be higher, in the $5.70 to $5.90 range.
The 15 analysts who cover AMED are likely waiting for Amed’s guidance update and to see if there are any health bill developments. The Suntrust upgrade Monday to a $70 target is using a pessimistic assumption of a revision to a retroactive 2.5% Medicare billing rate reduction for 2010. Currently, analysts' EPS forecasts for 2010 include varying degrees of Medicare price decreases, e.g. BB&T at $5.22, UBS at $5.26. Jeffries has a low forecast of $4.36 based on a 5% Medicare price cut assumption. Based on the CMS approved (effective) 1.8% price billing rate increase for 2010, Amed’s EPS is likely to be around $5.70. If the already approved CMS price increase were retroactively withdrawn (highly unlikely) and prices remained unchanged, then the 2010 EPS would likely be around $5.40.
The updated Amed guidance will have to be incorporated by the analysts and I believe a slew of impressive upgrades will then ensue. This will be a disaster for the 53% huge short interest, since the price targets will move to around $85 and $100 as 2011 becomes visible on the horizon, based on a 15x p/e. Institutions are accumulating this stock (based on increasingly bullish guidance from 14 of the 15 analysts), so covering this short interest could be a nightmare. It’s impossible to forecast what will happen to the stock price during the potential short covering stampede.
Historically, until 2008, Amed carried an above industry average p/e since it is the industry leader and is growing sales and profits fastest. The bogus fraud stories floated by hedgies lowered the p/e. That position is likely to be reversed during the next few months with the accelerating performance and forthcoming guidance of Amed. With the industry average at 13.21 I would expect Amed to command 15x p/e given the outstanding track record of growth and projections for industry consolidation. Amed can grow eps at 15 to 20% indefinitely, given the fact that four professional public companies still only control 10% market share.
Amed is an amazing cash machine, likely to generate $250 million of free cash flow in 2010. It’s great to own shares in a company that doesn’t need much capex to produce good profits and whose business is unrelated to the broad economy. The long term driver in the home health care (hhc) industry will be the aging baby boomers.
Sources of AMED Growth
With 170 branch start-ups in the pipeline and an 18-month cash payback on the branch start up investments, one can see why Amed will remain a growth engine in this highly fragmented industry. Acquisition paybacks are running at just over three years payback. Economies of scale are becoming significant. Amed has been able to eliminate $30 million of cost following the $300 million acquisition of TLC.
There are five primary sources of ongoing rapid revenue growth:
1. Organic growth as more referrals are gained each year by each branch, based on superior performance metrics and growing reputation. Increased revenue per patient (aging demographics / # of treatments per client, new revenue programs like ’Balance for Life’ etc). Pricing, 1.8% increase for 2010 but unlikely to exceed inflation in future.
2. New hub and branch start-ups, branching out from an established hub structure.
3. Acquisitions. Amed slowed this in 2009, pending more clarity regarding healthcare legislation. Amed is now restoring rapid acquisition growth plans. Acquisitions, like the recent Hackensack deal, create new hubs which facilitate rapid organic branch growth.
4. The health insurers, like Humana (NYSE:HUM) who are now awarding big contracts to Amed in an effort to keep the insured out of expensive hospitals. A common sense solution.
5. Increased focus on rapidly growing the still small hospice division, which is very synergistic with the hhc business. Most hhc customers eventually require end of life institutional care and the referral is by the same doctor.
Profit growth is mainly driven by this revenue growth model. Pricing has remained relatively flat with CMS approved increases of zero in 2008 and 2009 then 1.8% (effective) increase for 2010. Negligible inflation has kept costs relatively flat. Profit margins have been improving due to growing economies of scale. Amed is superb at managing the efficiency of case loads and maximizing visits and efficacy per nurse through computer systems support.
Why the Short Interest
Initially there were two arguments:
- The floatation of bogus rumors of Medicare fraud - now dispelled.
- The concerns regarding the proposed Healthcare reform and impact on Medicare pricing.
The short interest is (now) primarily a gamble that a new healthcare bill damaging hhc will somehow emerge this year and will reduce billing rates and revenues at Amed. The false Medicare fraud accusations which were floated late year by shorts have been removed by the Marwood report and the intensive due diligence by the incoming COO and officer hires. Amed routinely handles 175 audits per year. If I were a hedge fund, I wouldn’t want to gamble my investors money on Congress implementing a healthcare bill before the Nov elections
Healthcare Bill Chances
There is still great uncertainty about the future of the healthcare bill. But, quoting Peggy Noonan from Saturday’s Wall Street Journal:
“The battle over the President’s health-care plan is over, and plan will not be imposed on the country. Waxing lyrical over the virtues of the bill was a rhetorical way to obscure the fact that it is dead. To say I’m licked and it’s done would have been damagingly memorable. Instead he blithely vowed to move forward, and moved on. The bill will now get lost in the mists and disappear. It is a collapsed soufflé in an unused kitchen in back of an empty house. Now and then the President will speak of it to rouse his base and remind them of his efforts.”
Investors must decide for themselves. But industry lobbying, spearheaded by Amed, was successful in persuading the Senate to pass a relatively benign version of the bill which would not have any rate reductions (re-basing) until 2014. The Senate proposed a 3.5% billing reduction on $30 Billion spending in 2014, partly since this would produce more savings than on a $19 Billion 2010 spending now - without damaging the viability of the industry. (Remember 35% of the industry is only operating at B/E or a loss currently). The hhc industry has focused it’s lobbying efforts on the Senate so far, though they plan to ramp up the lobbying of Congress. The message is pretty simple: Medicare can save big money by keeping the burgeoning population of unhealthy old folks out of expensive hospitals though expanded emphasis on much cheaper home care. Hhc should be supported and encouraged, not attacked (especially when studies show that 35% of the industry is currently unprofitable).
Industry management believe that the normal course of Medicare rate-setting, will have a more pronounced effect on the home healthcare providers than any new legislation.
Support by the Analyst Community
An in depth study by 16 analysts is a very reassuring underpinning for Amed shareholders. The fact that 12 of 16 analysts turned up for a dinner in New York, with the whole Amed management team after the recent Jeffries presentation is a strong show of support for Amed’s prospects.
Pressure will mount on several of these analysts when Amed provides the updated guidance on Feb 23rd.
While it’s nice to under-promise and over-deliver, some institutional clients will be miffed that they left a lot of money on the table by not upping their ownership of Amed. I believe there will be a stampede by analysts to provide more pragmatic updates of EPS guidance and share price targets. Their problem is that the hedge fund shorts are also their clients, and their brokerages are making serious money lending them Amed stock (as are the confident long term institutional owners/lenders who are making 12% a year from lending out the stock). That’s why no one is really interested in actually holding stock certificates. What an ethical world we live in.
I predict that after the adjustment to the new target price of $85, Amed will appreciate each year by 15% to 20% in line with the sales and earnings growth as Amed ‘rolls up’ this industry. There will be fits and starts based on peaks and troughs in acquisition activities.
Disclosure: Tuscadog’s long on AMED