Recently, we downgraded AmSurg Corporation (AMSG) to Underperform with a target price of $23.00. Although AmSurg recorded an 11% year-over-year growth in revenues during the fourth quarter of 2010, the company is witnessing several challenges in the near term, which gets reflected in its outlook for 2011. The company’s guidance of $740−$770 million in revenues resulting in EPS of $1.64−$1.68 was below our expectation of $1.78.
Among the various challenges witnessed by the company, economic uncertainty continues, affecting elective and screening procedures for the last few quarters. However, contrary to the previous trend of a 2% decline in same-center revenues during the first three quarters of 2010, the company’s same-center revenue remained flat during the fourth quarter. AmSurg has projected continued softness in same-center volume and although the company plans to open 18−20 new centers, same center revenues are expected to range within flat to -1% in 2011.
Additionally, AmSurg will witness pressure on its bottom line due to higher interest expenses and higher tax rate. During 2010, the company recorded a 75% increase in interest expense to $13.4 million due to refinancing of credit facility in May 2010. The higher tax rate is primarily related to higher effective state tax rates in places where the company recently acquired centers. Higher interest expense and tax rate will reduce the company’s EPS by 5 cents and 2 cents, respectively. Moreover, based on the reimbursement rates for 2011 (announced in November 2010), net earnings in 2011 are estimated to be hit by 5 cents compared with 2009.
Despite these challenges, the industry dynamics remains strong. For the past few years, government programs, private insurance companies, managed care organizations and self insured employers have implemented various cost- cutting measures to keep healthcare expenditures in check. These measures together with technological advances have resulted in a shift in the delivery of healthcare services away from traditional inpatient hospitals to more cost effective sites including ASCs.