Kyle Sorgel's  Instablog

I recently stumbled onto a stock called AmSurg Corporation (AMSG). What they do is partner with physician groups and create ASC’s (ambulatory surgery centers) where patients can get a surgery done on an outpatient basis for much cheaper than it can be done at a hospital. How much cheaper?? Up to 42%, with a typical surgery being between 10-35% cheaper according to the Same Day Surgery Panel at a Healthcare Conference a month ago. With the healthcare reform looking to find costs savings in the wave of rising healthcare expenses, the value proposition from ASC's is just too good to overlook. What about quality though? The surgery centers use a lot of the same staff at hospitals to run the clinics, so the service is virtually the same.

“60% of the 5000 ASC’s aren’t affiliated with anyone…”

AmSurg: 202 centersNovaMed: 37 centersThis was another comment made from the Same Day Surgery Panel. What this means is that the industry is extremely fragmented which provides a good opportunity for the current market leaders to acquire and consolidate into a fewer larger players over an extended period of time. Currently their are only 2 publicly traded pure play ASC’s, NovaMed Inc. (NOVA) and AmSurg Corporation (AMSG). 

I took the operating cash flow and subtracted capital expenditures and minority interest payments to get free cash flow. As you can see, both of these companies have a very attract valuation relative to their cash flows. 

NovaMed used to be primarily focused on optometry, but is now diversifying its business into new segments to capitalize on more growth opportunities. Despite that, the majority of the revenue for the firm is still derived from optometry which might be more of a strength than a weakness. Cataract surgery is one of the services offered by NovaMed and given the exteremely high rate of elderly needing cataract surgery this will provide a lot of organic growth in the near future. According to cataractsurgery.com, half of the people at age 65 have a cataract and almost all people at 75 have a cataract. Combine this with the swell of elderly coming down the pipe in the next few years and their will be a big boom in the demand for cataract surgery. The chart below was taken from a study called "The Aging Population and its Impact on the Surgery Workforce". Essentially the study showed that the demand for surgeries will increase significantly faster than the supply of surgeons creating more work per surgeon. The chart illustrates which type of surgeries will be effected the most.

Link to study: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1422682/


 

AmSurg's business is mostly focused on gastroenterology, ophthalmology, and orthopedics. Their new focus is adding weight control surgeries to their centers, which is heavily influenced by the upswing in the amount of people with diabetes. The below chart is a little out of date, but as of 2007 their were 24.6 million people with diabetes. This will provide much organic growth for AmSurg in the future, if this trend continues.



Overall, I like both AmSurg and NovaMed as a pure ASC play. AmSurg is more diverse in its product offering and its geographic locations, but NovaMed has a much more attractive valuation and has a big optometry operation (most of which is in Florida). AmSurg reported a soft quarter and slightly cut its view for 2010, but I see this as an opportunity to pick up shares at a cheaper price. NovaMed reports its earnings on April 29th, 2010. I currently own both and will acquire more as cash is freed up.

Summary of Investment Thesis:

• Attractive valuation relative to cash flows
• Pricing advantage over hospitals which could sway the government into funneling more people towards ASC's for surgeries rather than hospitals
• Strong Industry Trends --> Aging Population, increasing rate of diabetes cases, surging need for cataract surgeries
• Highly fragmented industry --> huge opportunity for market leaders to acquire and consolidate
• Demand will outstrip supply in the next decade

Disclosure: Long AMSG and NOVA