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.

The financial picture continues to be strong for this long-term care firm.  Amedisys finished the first quarter with $25.6 million in cash along with $154.4 million in accounts receivables.  Skeptics have discounted account receivable balances in the past citing difficulty in collecting on these balances.  However, this quarter the company reported a drop in the Days Sales Outstanding (DSO) level which indicates success in collections processes.

The company also enjoys an additional $166 million of available funds under a revolving credit facility.  This means that management has plenty of dry capital to use for acquisitions which has been a primary driver of growth in the past.  During the first quarter Amedisys spent $7.5 million on acquisitions and will likely continue to announce purchases as opportunities are quite attractive due to the weak economic environment and lack of available credit for many competitors.  As AMED completes these acquisitions, they are able to roll out specialty programs that have higher margins and more profitability.

Amedisys is growing organically as well, with 160 start up locations in various stages of opening.  But despite the strong growth prospects, AMED is still trading at a very low multiple.  The discount is largely due to industry fear of Medicare reimbursement cuts.  But since AMED typically saves Medicare from higher costs related to hospitalizations, the company should receive preferential treatment.  At the same time, weakness in the industry works to AMED’s advantage because they can purchase competing locations for cheap prices.

The ZachStocks Growth Model has a position in the stock which should contribute to outperformance this year.  (you can get a free trial to the model here).  If the company simply meets expectations for the current year and investors begin to pay a more reasonable multiple (conservatively estimated at 15), the stock could quickly rise to a price above $60.  That’s a nearly 100% gain from current levels!  At this point it appears the market is discounting the worst case scenario and any positive surprises could quickly move the stock.

FD: Author has a long position in the ZachStocks Growth Model
AMED Notes
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