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 siginificant 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.
The company’s primary business is providing in-home health care and hospice services to acute patients. As technology advances, it is becoming easier to provide quality service in the home with a few key side benefits. First, there is much less risk of infection when patients are treated at home. Second, patients are more comfortable and often heal more quickly when they are treated at their own residence. And finally, the costs associated with treating a patient at home can be significantly less than costs associated with a hospital stay where the patient is occupying a bed and using the entire resources of a hospital staff.
It’s tough to argue with the trend towards Home Health and Hospice care. In 2006, Medicare spending for home health reached $14 billion with hospice coming in at $9.2 billion. Those numbers are expected to reach $36 billion and $20 billion respectively in 2017 as you can see in the chart below.
Amedisys has proven to be a disciplined growth company and has used its resources very wisely over the past 18 months. Coming into this period, AMED had a very strong balance sheet with low debt levels and plenty of access to capital. During the liquidity crisis, the company was able to opportunistically buy out competing firms and expand their footprint by a large margin. Making these acquisitions at an opportunistic time allows the company to grow their revenue base very quickly, while still keeping their costs relatively low.
While acquisitions have played a big part in the company’s recent expansion, management is committed to starting up new offices in areas where they can see a strong return on investment. Typically it costs $250,000 to $350,000 to open a new location and it takes about 18 months to recoup that cost. By the end of the second year of operations, a typical start-up will generate $1.5 to $2.0 million in reveune. So it is clear that these start-up locations can have a strong impact on earnings in the coming quarters. In 2009, the company has set a goal of opening 40 home health locations and 5 hospice locations which will likely begin generating profit in late 2010 and early 2011.
Amedisys receives referrals from both hospitals and individual physicians. However, compared to the national norms, the company recieves a greater weighting of physician referrals which are usually more acute situations. According to the company’s presentation, their average patient is 82 years old, and is taking an average of 13 medications. These patients tend to have higher Medicare reimbursement rates as the care is more intense. This obviously leads to a more profitable business model and allows the company to provide a higher quality of treatment to those who need it most.
When considering the quality of care, Amedisys appears to be a step ahead of the curve. The company monitors its outcomes on a number of different criteria including categories such as “Improvement in Pain, Improvement of Surgical Wounds, or Improvement in Management of Oral Meds.” In nearly every case, Amedisys has a better score than the national average. These results will go far in lobbying for continued Medicare support.
The stock has rallied sharply off its low in June as investors are beginning to realize the strength of Amedisys’ company as well as the reduced potential for the healthcare reform to hurt revenues. But even after the recent 30% run, the stock still appears extremely under-valued and is trading with a single digit PE. If the company is simply able to maintain current earnings levels, the stock would still appear relatively attractive. But given the history of 60 to 85% increases in revenue and 45-60% increases in earnings, it appears that investors are being overly cautious. I would expect the stock to be a great buying opportunity anywhere below $50 and possibly much higher if the company’s investments begin to generate significant cash flows.
FD: Author has a long position in the ZachStocks Growth Model
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