3Q09 (Qtr End 9/30/09) Earnings Call Transcript

October 27, 2009 10:00 ET

Sentiment

Stocks have bounced back from early losses and are trading mixed late Thursday. The table was set for weakness after Citi (C) and Goldman Sachs (GS) slipped on earnings news. While both reported profits and revenues that beat Street expectations, shares slipped as some of the good news might have been already discounted during the latest market rally. It was buy the rumor, sell the news.

Meanwhile, the day's economic news was mixed. Before the start of trading in New York, the Labor Department reported that the Consumer Price Index [CPI], a gauge of inflation at the consumer level, rose .2 percent, which is in-line with expectations..

Quanta Services, Inc. (PWR) – A long-term bullish play on the provider of specialty contracting services today caught our attention amid a more than 1% rally in shares to $22.00. The bullish reversal we observed in the January 2011 contract suggests at least one investor expects Quanta Services to move higher by expiration. The reversal involved the sale of 4,671 puts at the January 20 strike for a premium of 3.30 apiece, spread against the purchase of 4,671 calls at the higher January 25 strike for 3.10 each. The transaction results in a net credit of 20 pennies per contract. The full credit is retained by the investor as long as shares of PWR remain higher than $20.00 through expiration. Additional profits are available if the stock rises above the effective breakeven point at $25.00. We note that Quanta’s shares last traded up to $25.09 on September 11, 2009.

September is just another month

September has come and the end of the world (or the end of the market rally, which to our readership would probably be one and the same) seems a little tardy. Alternatively, it has already started, and the sell-side just hasn’t paid attention as they continue to worry less about the end of the current market rally and more about how their kids settled in on the first day of school.

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.

Tuesday's Wall Street Journal had an article that asked the question "Can Rally Run without Revenue?" Is the revenue situation really that bad?

Let's take a quick look at some the data compiled through the Alert HQ process.

Amedisys Inc. (AMED) released its numbers for the second quarter last week and the results were certainly impressive. The company realized EPS of $1.27 for the quarter which was up 67.1% over the same quarter last year.

I must point out that even though earnings are 67% higher than they were at this time last year, the actual stock price is roughly 33% lower than August of 2008 when the stock actually hit its climax.

Amedisys Inc. (AMED) has had a challenging year so far. The home healthcare provider has seen its stock cut nearly in half from its high in February, and while many stocks were enjoying triple digit gains off their March lows, Amedisys simply made up about 50% of its decline. Still, the company is on solid footing and appears to be building a foundation which could lead to significant leverage in the coming quarters.

Part of the reason Amedisys stock has been weak is investor fear over Obama’s healthcare reform plan which could significantly reduce Medicare spending in certain situations. But many of these fears appear to be relatively unfounded as Amedisys could actually benefit from a reform to the Medicare system. Since Amedisys actually saves Medicare money in many cases, its services could become even more valuable as Congress looks to find ways to cut costs and still deliver appropriate care.

I’m a big fan of order and discipline. Most days I have my time blocked out in half hour increments in order to plan and accomplish all the tasks that I want to do on a particular day. To say that I am a creature of habit is an understatement and for the most part, my habits are carefully designed to produce results.

But occasionally, I find that stepping out of my normal routine can uncover some opportunities and new ideas that I can incorporate into a new daily or weekly schedule. So this weekend when I took a flight to Baltimore to meet with Taipan Publishing Group, I picked up a Barron’s and read it on the (delayed) flight from Atlanta to BWI. Now I usually have Barron’s incorporated into my weekly reading, but I get the online version and often skim through the articles and nothing more.

This is the 1st Quarter 2009 edition of our ongoing hedge fund portfolio tracking series. (Before reading this update, make sure you check out the Hedge Fund 13F filings series preface.)

Next up is Dan Loeb's Third Point LLC, a $2 billion hedge fund firm. Specifically, they deem themselves to be "event driven, value oriented investors." Loeb founded the firm back in 1995 with $3.3 million in seed capital and is still running the show these days. While Third Point is technically an activist fund, Loeb often has numerous passive investments as well. Loeb himself is quite well known for his searing and critical letters to management of various companies. Third Point has seen annual returns averaging over 15% since inception (including the crazy year that was 2008), a Sharpe Ratio of 0.9, and a correlation to the S&P500 of 0.4. As per their April investor update, we saw that they were net long healthcare and utilities, while being heavily net short consumer at that time.

This is the seventh in a series of articles covering the home healthcare industry. See part 1 here, part 2 here, part 3 here, part 4 here, part 5 here and part 6 here.

Facts are simple and facts are straight, facts are lazy and facts are late,
Facts all come with points of view, facts don’t do what I want them to,
Facts just twist the truth around, facts are living turned inside out,
Facts are getting the best of them…

This is the sixth in a series of articles covering the home healthcare industry. See part 1 here, part 2 here, part 3 here, part 4 here, and part 5 here.

In the last article, we used AFAM as a case study to assimilate the dynamic drivers of VN admissions growth we reviewed in the first four articles. AFAM had 7,737 admissions in 2001, of which almost 60% were referred from hospitals, about 30% from physicians and the remainder from various assisted living facilities. It had 39,666 admissions in 2008, of which about 45% were referred from physicians, 35% from hospitals and the remaining 20% from assisted living facilities. That 23% CAGR in admissions over eight years can be broken down as follows:

We’ve had quite a spring rally in the last two months. It’s hard to believe that the S&P 500 has rallied as much as 40% since the panic levels in March, and many individual issues have given investors chances to double or triple their money in just a few short weeks. We are now beginning to hear whispers of economic recovery and new bull markets. (Actually, by definition, this latest rally constitutes a bull market because it exceeds a 20% gain - but don’t try to explain that to investors who are still 41% below the October 2007 high).

At ZachStocks, we have had plenty of opportunities to participate in the gains along the way. Continental Resources, Inc. (CLR) has risen 117% since our post in early March. Intrepid Potash, Inc. (IPI) was also a recommended long position and has returned 93% since our discussion. And The Blackstone Group L.P. (BX) has risen 147% since we discussed the company just after the rally began. At the time, the opportunities for aggressive trades were very clear. However, today’s market is getting to the place where the risk begins to cloud the picture. In the ZachStocks Growth Model we are taking some of our investment capital off the table, and looking toward some more defensive positions to protect our gains.

This is the fifth in a series of articles covering the home healthcare industry. See part 1 here, part 2 here, part 3 here, and part 4 here.

“…after a repetition of similar instances, the mind is carried by habit, upon the appearance of one event, to expect its usual attendant, and to believe, that it will exist.” (David Hume, An Enquiry Concerning Human Understanding)

Wall Street is littered with cliche statements aimed at imparting subtle wisdom.

• Markets climb a “wall of worry” and usually slide down a “slope of hope.”
• Bulls make money, Bears make money, but pigs get slaughtered.
• Cut your losses and let winners run.

And today’s most applicable statement is to Sell in May and Go Away. The statement basically comes from statistical studies which have proven the “October to May” period to have stronger gains than the Summer doldrums. There are plenty of explanations for this… The wall street brokers may spend the summer relaxing in the Hamptons instead of calling prospects. Investors may use more capital for leisure than for investments. Or it may be that businesses grow more quickly in winter months as managers hunker down and get work done.

This is the fourth in a series of articles covering the home healthcare industry. See part 1 here, part 2 here and part 3 here.

The first three articles in this series should have served to contextualize the emergence and maturation of the “Prospectivized" home healthcare industry. Along the way, we took a meaningful peek at stock prices through the end of 2008. In this article, we will get a close-up view of how the prices of our four publics (AFAM, AMED, GTIV and LHCG) came to be so cheap at the beginning of this year.

Amedisys, Inc. (AMED) is trading higher this week after a healthy earnings report. The company beat analyst expectations by two cents reporting EPS of $0.99 on revenue of $341.8 million. Both figures were up 60% compared to the first quarter of 2008. While much of the revenue increase was due to acquisitions, the increase in profit was largely due to lower General and Administrative expenses as well as a decline in interest expense.

On top of a good historical report, management gave an encouraging picture of the current economic climate. Specifically, it looks like industry lobbying efforts may be making progress in regards to the 2010 budget. Management believes that Congress can reach a bipartisan agreement on the budget that will not include a cut to Medicare. This would certainly give mutual fund managers who own the stock some confidence, and could cause problems for hedge fund managers who may be short due to concerns over a potential cut in reimbursements.

This is the third in a series of articles covering the home healthcare industry. See part 1 here and part 2 here.

As we learned in the previous article, systemic changes have been the dominant factors in admissions growth for this industry and will remain as such at least until 2017. Now we will peer inside this high-growth industry to learn how, at the turn of this century, the sails of a handful of companies were lifted by the confluence of disparate, but correlated, winds. Those leaders—especially our four publics, AFAM, AMED, GTIV and LHCG—are now positioned, more so than leaders from other industries within healthcare, to benefit greatly from consolidation, future healthcare reform and eventual demographic changes.

This is the second in a series of articles covering the home healthcare industry. See part 1 here.

As demonstrated in the previous article, demographics have not been, nor will be for several years, a meaningful driver of admissions growth for home healthcare agencies (HHAs). In this article, we will review the systemic changes that have caused about four fifths of this industry’s 6.25% admissions growth from 2001 to 2006 (a figure that certainly increased over 2007 and 2008). We will spend the next article studying how our four publics (AFAM, AMED, GTIV and LHCG) have voraciously devoured more than their fair share of this expanding pie.