Amedisys, Inc. (NASDAQ: AMED, Stock Forum) beat earnings expectations recently, reporting earnings of 99 cents a share compared to consensus estimates of 97 cents. Revenue came in at $341.8 million, representing growth of 60% over the same quarter last year. The stock has been trading higher in the aftermath with investors confident as a result of lower expenses and stronger margins.
In addition to a great quarterly release, management also issued positive guidance – especially considering the current market weakness. The industry has been hard at work lobbying Congress to refrain from Medicare cuts and it looks like the 2010 budget could be passed with favorable language towards the industry. A bipartisan budget without Medicare cuts would certainly be positive and give institutional investors a better excuse to accumulate positions.
Amedisys has a strong financial foundation after finishing the quarter with more than $25 million in cash and another $154 million in receivables. One of the critiques of this long-term care company has been its ability to collect unpaid bills. But during the quarter Amedisys saw the number of days of billing outstanding (DSO) drop materially. The improvement helps provide a better picture of long-term earnings as it gives validity to the level of receivables on the books.
Should the company need access to additional funding, there is $166 million still available under a credit facility that the company could use for acquisitions or business expenses. Amedisys has a reputation for acquiring its competition and spent $7.5 million last quarter on such purchases. A weak environment for the sector could help AMED pick off more of these targets. Once acquisitions are complete, Amedisys can institute its higher margin programs at the new locations to drive profitability.
The company is also growing in a more traditional approach, and is currently in the process of opening up 160 different locations. The stock trades at an attractive price as industry analysts are afraid that Medicare cuts will slice into profitability. But Amedisys should receive good treatment from Medicare plans considering how much the home-health company actually saves in traditional hospital related costs. Once this becomes clear, the stock could quickly rebound.
Currently, Amedisys is a core position in the ZachStocks Growth Model and is expected to deliver strong gains over time (you can get a free trial to the model here). Once investors regain confidence in the stock, it would not be uncommon to see AMED trading at a PE of 15. Although this is a relatively conservative multiple, the price of the stock would have to nearly double in order to reach this level. A full recovery may take time, but the fundamentals are solid and much of the risk should be out of the picture. ZachStocks recommend purchasing up to a price of $40.