One of the strongest trends in the market is the aging population of the baby boom generation. About 10,000 people are retiring in the United States every day. This equates to about 3.65 million new retirees every year.
This aging population will have an increased need for Amedisys' (AMED) home health, hospice, and personal care services. The company stands to benefit from increased revenue and earnings growth as the health of this population declines over time. Amedisys has strong fundamentals in addition to revenue and earnings growth such as a strong balance sheet, high ROE & ROIC, and growing cash flow. The strong fundamentals and overall growth will drive the stock to outperform over multiple years.
Achieving Growth in All Segments
Amedisys is achieving growth in all three segments. The Home Health segment is the one that matters the most as it comprises 71% of the company's revenue. I think Amedisys will build on the success of the 6% gain in same-store volume and 4% admissions growth that the company achieved in Q3 2018.
There is a shift happening where health care providers are moving elder care from skilled nursing facilities and hospitals into the home. This shift is a result of the lower costs associated with home health care and the projected rise in Medicare spending growth. Medicare accounted for 15% of Federal spending in 2017. This is expected to increase to 18% by 2028. Home health care is viewed as a cheaper alternative to hospital and skilled nursing facility care, which will help lower provider costs.
This shift will provide Amedisys with further growth for their Home Health segment. I expect this to provide multiple years of growth for Amedisys. There will be an increase in the amount of aging people using home health services for the foreseeable future.
The Hospice segment is also performing well for Amedisys. Hospice admissions increased 8% with the average daily census increasing by 11% in Q3. Hospice accounts for 25% of Amedisys' revenue. Amedisys is outperforming the national average for hospice care according to 7 measurements indicated by the November 2018 release of the Hospice Compare publication.
The need for hospice care is likely to increase along with the aging population. Since Amedisys is outperforming the industry average for hospice care, the company stands to benefit significantly over multiple years.
Amedisys recently announced plans to acquire Compassionate Care Hospice (the 8th largest hospice care organization in the United States). This deal is expected to close in February 2019. The acquisition will make Amedisys the third largest hospice organization in the United States. Amedisys is planning on investing in Compassionate Care in 2019 to set up multiple years of growth for the business.
The company's Personal Care segment only comprises about 4.5% of total revenue. Although this segment comprises a small amount of revenue, it is performing well. The amount of clients served in Q3 increased 55%, while billable hours increased 32%.
The Personal Care segment is likely to have a larger impact on Amedisys' revenue over time. Amedisys plans on growing this segment organically (by increasing clients) and inorganically (through new acquisitions). Amedisys just closed on their acquisition of Bring Home Care on October 1. That will be a source of new revenue for this small, but growing segment.
Overall, all of Amedisys' segments are growing. I expect all three segments to continue to grow as the company capitalizes on the long-term trend of an aging population with an increasing need for the company's services.
The company's fundamentals will support growth and positive returns for shareholders. The obvious fundamentals for Amedisys are strong revenue and earnings growth. Consensus estimates among 9 analysts are showing expectations of 8% revenue growth and 13% earnings growth for 2019. The revenue expectations are achievable as the company continues to drive growth in each segment by increasing clients in existing businesses and through the acquisition of new businesses.
The earnings growth is being driven by strong returns. For example, for the past twelve months, Amedisys achieved an ROE of 18.5% and an ROIC of 16.97%. These strong returns demonstrate the company's ability to get great returns for their equity/investments. This will help drive double-digit earnings growth for Amedisys. These strong returns will make the consensus estimates for 2019 easily achievable in my opinion.
Amedisys has a healthy balance sheet. This will give the company the ability to grow the business and to make acquisitions. Amedisys has $14 million in total cash with $56 million in total debt. The company has about 2.6x more total assets than total liabilities for total equity of $445 million. With positive cash flow, Amedisys can handle their debt payments.
Amedisys has retained earnings of $92 million. The company uses this money to grow the business. This growth is being reflected in stock price appreciation. I expect this to continue as Amedisys invests in new and existing businesses going forward.
These fundamentals are supported by strong cash flow. Amedisys achieved operating cash flow of over $191 million and free cash flow of $184 million for the past 12 months. That was significantly higher than the amounts achieved in 2017, which were operating cash flow of $105.7 million and free cash flow of $95 million. This cash flow will help the company expand for future growth. That will be reflected in an appreciating stock price over time.
I know many investors are turned off at Amedisys' forward PE of 33.6. That is an above-average forward PE as compared to the Home Health Care industry's average forward PE of 28.9. However, I think the PEG ratio is a better measure for Amedisys since the company has the likely potential to achieve above-average earnings growth for multiple years.
Amedisys is trading with a PEG ratio of 1.7. This is below their industry's average PEG of 2.3. I'm using the 5-year PEG ratio which accounts for the average annual expected earnings growth for the next five years.
While it seems difficult to project that far out, it is not really unreasonable due to the tailwinds that Amedisys has going for it. The pace of the aging population will allow the company to achieve multiple years of above-average earnings growth. Combine that with the company's strategy to grow existing businesses and to acquire new ones and it is simple to see how Amedisys will benefit from market conditions and their own actions.
Here's how Amedisys compares with industry competitors with similar market caps:
Expected 5- yr. Avg. Annual
|20%||18%||13 - 14%|
Frankly, I think all three of these companies will thrive over the next 5 years and beyond. They all are working to capitalize on the aging population trend and the needs for those with declining health. I like Amedisys because the company is expected to sustain the highest earnings growth. That is likely to drive the stock to outperform the others if Amedisys meets/exceeds expectations for most of their quarters.
All told, Amedisys' PEG ratio is in the range of the growth companies that I follow. When the PEG ratio is between one and two for these high growth names, the stocks tend to grow approximately in-line with earnings growth over the long term.
Outlook for Amedisys
Overall, I expect Amedisys to perform well over multiple years. They are doing the right things to grow existing businesses and to acquire new companies. Their strategy will help capitalize on the increase of declining health of the aging population.
I will point out that the current risk for the stock is that it is overbought according to the stochastic oscillator indicator (see chart above). So, the stock could pull back as investors take profits after the recent run-up. Despite that, I would view Amedisys as a solid long-term investment.
I think the stock will outperform for multiple years as a result of their above-average earnings growth. I'm giving the stock a one-year price target of about $147. This is based on the stock pulling back to about $130 on profit taking in the near term. From there, I'm expecting the stock to increase by about 13%, driven by earnings growth.
The price target would take the current forward PE ratio to about 36 based on expected EPS of $4.05 for 2019. While that sounds high, the PEG ratio would still remain below two at about 1.8. That would keep the valuation at a reasonable level for a high growth company. From there, I expect the stock to achieve multiple years of above-average gains.
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Disclaimer: The article is for informational purposes only (not a solicitation to buy or sell stocks). I am not a registered investment advisor. Investors should do their own research or consult a financial advisor to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.
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.