Amsurg: Monetizing The Changing Ambulatory Surgical Center Industry

| About: Amsurg Corp. (AMSG)
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Summary

ASC industry is undergoing a major change and Amsurg is monetizing it well.

Leading the industry consolidation, via strategic acquisitions, to improve portfolio and turn into a major healthcare services business.

Stock has yet to catch up to the changing profile of the business.

Amsurg Corp. (AMSG), after the heightened volatility of the last few months, seems well positioned to monetize the favorable dynamics in the Ambulatory Surgical Center (ASC) space, just as the benefits from the recent acquisitions start flowing through. The company's recent effort to lead consolidation in the space may have increased the 'uncertainty quotient', but the fundamentals suggest that both the timing and initiatives are apt and investors might be well served to capitalize on the heightened fear and take a closer look. This note carries forward the argument about the fast changing ASC industry, discussed in previous notes on Surgical Care Associates (NASDAQ:SCAI) and Surgery Partners (NASDAQ:SGRY).

Besides the broader market environment, the sentiment around Amsurg has been hit by concerns around acquisitions, both the ones that went through and the bids that never materialized, like the TeamHealth (TMH) deal. The concerns are not completely unfounded, the balance sheet has definitely stretched recently and the size of the deals are also getting bigger, which combined with the expected volatility in the healthcare sector during the election year can make even the staunchest of the bulls take a breather.

Amsurg strategic edge. Image Source: AMSG presentation 2015

But this aggressive positioning to lead the consolidation, which seems risky right now, may be proven the correct strategy. As discussed in detail in my previous notes, ACA (Affordable Care Act) and other regulatory changes are offering some favorable tailwinds to the ASC space. The industry continues to be a fragmented one and the insurers are consolidating. Overall, the case for consolidation is easy to make.

Via acquisitions, the company is clearly leading the charge in not just industry consolidation, but also working towards offering a full service physician services platform, seeking leadership in certain service offerings, geographic expansion and improve upon top line and cash flow growth rates. The strength of the operating metrics instills confidence in terms of the company's strategic choices of acquisitions and the ability to drive synergies out of the same. The finances, including the balance sheet and cash flows, are in shape to suggest that the initiatives can be carried on, in spite of the market volatility, including credit markets.

Comps

EV/ EBITDA (trailing)

Rev. growth est. last fiscal

Rev. growth est. next fiscal

P/E last fiscal

P/E est. next fiscal

AMSG

8

57%

17%

18

16

SCAI

7

18%

10%

20

19

SGRY

11

131%

12%

132

21

*SCAI EBITDA source: SEC filings

In the meantime, the stock has yet to reflect the fast improving finances, as proven by the results that are coming ahead of expectations and the company increasing guidance during the last quarter's conference call. Relatively, there is hardly any premium enjoyed by the business, against peers in the same space or the broader healthcare industry, for the stability offered from the recent diversification, scale as well as positioning in the ASC space, history of performance, absence of any threat of dilution from any large shareholder or the relatively easy opportunity to de-lever the balance sheet, creating value for the shareholders.

Taking charge to position for the next wave

The company has been an aggressive acquirer, but there seems to be an order to the acquisitions. The deals have varied from small, tuck-in types to major ones like Sheridan. Both to grab share in existing markets as well as to extend reach into new ones. As for organic growth, 0-2% type of volume growth can be easily supported just from more uninsured get insurance with the help of ACA, but for Amsurg, more services and geographic expansions from the recent acquisitions can be major growth drivers.

As for service offerings, the company has successfully moved away from once a heavy reliance on Gastroenterology, as a percentage of total revenue. The recent Valley Anesthesiology & Pain Consultants deal adds a marquee anesthesiology and pain-management services practice. The Sheridan Health Care acquisition, which was a multi-billion dollar major buyout that was closed in mid 2014, provided scale and leadership positions in services like anesthesia, children's services, emergency medicine services and radiology. Indeed, the results are now segmented into two divisions - Physician Services and Ambulatory Services, of almost similar size.

Geographically, the business is no more concentrated on the east coast, but well established in the growing West. Both Sheridan and Valley, with significant presence in the Phoenix area, helped expand the services in the West, beyond the core south and east markets.

Financially too, the acquisitions should help the business get even more aggressive on the buyouts, especially in the current market environment. The Sheridan is expected to continue with its high single digit growth, while Valley, which has revenue per physician of almost $650,000 compared to $500,000 that analysts usually model, should give boost to the financial might of the combined operations. Both Valley and Sheridan are expected to have a similar type of margin profile.

Proving it to be a financially successful strategy

The recent revenue growth number has been helped by the acquisitions, but the strength is much beyond the top line numbers. The ASC segment continues to perform at a steady rate and Physician Services is also delivering on most comparative metrics, be it the double-digit growth rate of same contract revenues or mid-single digit growth in net revenue per encounter. The unconsolidated center in operation number is volatile due to low base, but improvement is noteworthy nonetheless.

ASC segment growth drivers

2013

2014

Q1-Q3 2015

Procedures

9%

2%

6%

Centers in operation (consolidated)

2%

2%

3%

Centers in operation (Unconsolidated)

50%

200%

44%

Same center revenue increase

n/a.

n/a.

6%

No doubt, the company increased full year guidance during last quarter's earnings call. Relatively too, the performance has been helped by decent acceptance of ACA in Florida, where Sheridan has a major presence, as well as market share gains.

Operating margins

2013

2014

Q1-Q3 2015

Ambulatory Services Operations

31%

29%

33%

Physician Services Operations

n/a.

15%

13%

Also worth noting is that expansion into PS business has not come at the expense of ASC, be it the margins or cash flows.

Adj. EBITDA margins

2012

2013

2014

Q1-Q3 2015

Ambulatory Services Operations

17%

18%

18%

18%

Physician Services Operations

n/a.

n/a.

21%

20%

Aggressive, not irresponsible

Financially, there is a fear, at least looking at the stock, that the volatile markets may somewhat destabilize the thesis or highlight the weakness as to the timing of the deals, but fundamentals simply do not support the same.

Fiscal Yr. (All $M, except per share)

2012

2013

2014

Q1-Q3 2015

Cash flow operations

$296

$333

$412

$427

Capital expenditure + Acquisitions

$306

$102

$2,224

$280

Free cash flow (Including acquisitions)

$(11)

$230

$(1,812)

$147

Adjusted EBITDA

$155

$188

$304

$355

Growth

-43%

22%

62%

83%

Adj. EBITDA/ Share

$4.89

$5.88

$7.68

$7.39

Since maintenance capital expenditure is barely 10% of the cash flow from operations, one may want to take into account the amount spent on acquisitions for a conservative look. The cash flows are comfortable and growing.

2012

2013

2014

Q1-Q3 2015

Book value/ share

$31.7

$35.2

$53.0

$46.8

Tangible book/ share

$(21.3)

$(20.7)

$(64.5)

$(54.6)

LT debt, current debt and PBO / share

$19.6

$18.3

$56.3

$46.4

Interest

$17

$30

$83

$91

EBITDA/ Interest

9

6

4

4

The initiatives are definitely aggressive, but considering the strength of cash flows, nature of the business and size of the balance sheet, there should be limited concerns over liquidity, especially now that the improvement is already underway. Indeed deleveraging might create significant value for the shareholders.

Reverse engineering the expectations

Fiscal year

2015

2016

Revenue growth expected

56.6%

16.9%

Revenue

$2,540

$2,969

Operating margin

15.9%

15.1%

Net Interest & Other

$110

$110

Tax rate

40%

40%

Shares (NYSE:M) diluted

48

49

EPS

$3.66

$4.14

Street

$3.66

$4.14

* Keeping everything else steady

* Author's calculation. Only for academic purpose, actuals may vary significantly.

Near term, expectations are mostly relying on the revenue addition from the acquisitions and little else. Any acceleration in terms of driving acquisition synergies may help the EPS numbers accordingly.

Earnings sensitivity analysis (Approx.)

Change of

Metric

EPS Change *

1%

Revenue

2-4 cents

1%

Operating Margin

30-35 cents

* Keeping everything else steady as % of revenue.

* Author's calculation. Only for academic purpose, actuals may vary significantly.

Note: Detailed proprietary model is not attached in this note for the sake of easy readability, but happy to help and provide more details to readers interested in understanding the calculations used in this note.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.