Selling Points

AMED Buy Recommendation 1
Roland George Investments Program
Peter Dzuba
Buy Recommendation – Amedisys Home Health Services
Presented Wednesday, October 20th, 2008
As of market close Thursday, October 16h, 2008:
Company
Ticker
Exchange
Sector
Industry
Market Cap
Average Volume (3m)
52 week H-L
Return on Equity
1
2
QUICK STATS
Amedisys Inc.
P/E
AMED
P/S
NASDAQ GS
P/B
Health Care 1
P/CF
Health Care Services 1
EPS (ttm)
$1.42 Billion 2
Dividend
1,240,730 2
Beta
$36.18-$67.98 2
Recent Price
16.48% 2
Fair Price (Avg.)
19.8 (18.5) 1
1.58 (0.63) 1
2.9 (3.7) 1
15.8 (15.1) 1
2.78 2
N/A 2
1.05 2
$53.01 2
$60.32
Baseline
finance.yahoo.com
Healthcare services industry, HCSVS, statistics in brackets.
RECOMMENDATION: Buy 900 shares of AMED (Total Investment: $47,709.00)
Selling Points
From Interview with Kevin B. LeBlanc, AMED Director of Investor Relations •
•
•
•
•
•
•
•
Not dependent on the economy since 86% of patients are covered by Medicare. Last major change to Medicare was made January 1st, 2008 and no other changes expected over the next three years. A typical AMED home health visit costs under $100 per day. A day in a nursing home costs over $500 per day and a day at a hospital costs over $5,000 per day. By staying at home, patients get to stay in a comfortable environment and eat the food they want to eat. Furthermore, they avoid exposure to other disease/illness causing agents that they would otherwise be exposed to at a hospital. AMED is expected to surpass its primary competitor, Gentiva Health, in total revenue over the upcoming 12‐months. Surpassing Gentiva will give it first‐mover advantage with this new baby boomer demand. There are already 8 million patients in the United States receiving home health care each year. As baby boomers age, that number will only rise in the months and years ahead. Demand for health care is fairly inelastic and therefore independent from market fluctuations. Recognized as one of the top 50 most innovative companies in the country by InformationWeek Zacks recently named AMED a Powerful “Buy” Stock based on its aggressive pursuit of growth and acquisitions, its recent record quarter, and projected earnings estimates Next Earnings Announcement: October 28th, 2008. AMED Buy Recommendation 2
Product Description
Amedisys is one of the largest U.S. providers of low-cost home health services to the chronic, co-morbid, aging
American population. It is currently the largest home nursing provider in the Southern and Southeastern United
States. Amedisys divides its operations into two primary segments: the home health segment and the hospice
services segment.
Through their home health agencies, AMED delivers a wide range of services in the homes of individuals who
may be recovering from surgery, have a chronic disability or terminal illness or need assistance with essential
activities of daily living. The services include skilled nursing and home health aide services; physical,
occupational, and speech therapy. In addition, AMED offers clinically focused programs for high cost chronic
conditions and various diseases such as diabetes, coronary artery disease, congestive heart failure, complex
wound care, chronic obstructive pulmonary disease (“COPD”), geriatric surgical recovery, behavioral health, and
stroke recovery, as well as other rehabilitative programs. The typical home health patient is Medicare eligible, 80
to 84 years old and takes approximately eight different medications on a daily basis. AMED clinicians are
accessible 24 hours a day, seven days a week to answer their patients’ questions and to provide for their medical
needs with such services with their “Encore” nurse call center.
AMED’s hospice agencies provide palliative care and comfort to terminally ill patients and their families. The
company provides hospice services to each patient using an interdisciplinary care team comprised of a physician,
a patient care manager, registered nurses, certified home health aides, social workers, a chaplain, and homemaker,
and specially trained volunteers. The team then assesses the clinical, psychosocial, and spiritual needs of the
patients and their families and manages that care accordingly.
Picture 1: AMED Allows Patients to Receive Quality Medical Care in the Comfort of Their Own Home
AMED Buy Recommendation 3
Historic and Projected Company Trends
AMED was originally incorporated in Louisiana in 1982 (where it remains headquartered today). It then
transferred its operations to a Delaware corporation, which was incorporated in 1994 and became a publicly
traded company in August of that year. Since 1994, AMED’s stock has experienced a fairly uninterrupted, steady
upward trend as the following “max” chart clearly shows:
Chart 1 - Amedisys “Max” Historical Price Chart
This steady growth can be traced to the growth culture that permeates the company. AMED continues to
aggressively acquire firms and expand its sphere of influence within the Health Services industry. The following
table lists the numerous acquisitions that the company has already made throughout 2008 and should emphasize
the company’s unwavering focus on expansion.
Table 1 - 2008 AMED Acquisitions
October 2, 2008
AMED acquires six home health agencies in Pennsylvania, Maryland and Delaware. The acquisition
will expand the Company's coverage to five new counties in Maryland, a Certificate of Need (CON)
state, five new counties in Pennsylvania and provide statewide coverage in Delaware. The Company
also announced that it has completed the acquisition of Okanogan Regional Home Health and
Hospice in Omak, Washington.
June 2, 2008
AMED acquires five home health locations from Health Management Associates, Inc. (NYSE:
“HMA”). Three of the five are located in Mississippi and South Carolina, both certificate of need
(“CON”) states. The remaining two are in Missouri.
March 26, 2008
AMED acquires TLC Health Care Services, Inc. ("TLC"), a provider of home nursing and hospice
services with 92 home health and 11 hospice agencies located in 22 states and the District of
Columbia.
February 8, 2008
AMED acquires the holding company that operates Family Home Health Care, Inc. and
Comprehensive Home Healthcare Services, Inc. They operate 21 home health locations in Kentucky
and three locations in Tennessee.
January 3, 2008
AMED acquires a home health agency in Carolina, Puerto Rico.
January 2, 2008
AMED acquires six home health agencies located in Georgia and South Carolina, from Memorial
Health University Medical Center of Savannah, Georgia.
As a result of these expansions, AMED now has 14,400 employees has expanded its coverage to 35 states. It now
has 458 home nursing locations and 46 hospice locations.
AMED Buy Recommendation 4
Diagram 1: AMED Locations (as of June 30, 2008)
Source: http://www.amedisys.com/news/presentation/092408_files/frame.htm
AMED has been particularly adept at smoothly integrating each of its new acquisitions. This has resulted in a
steady growth of earnings per share over the last five years, as seen by in Diagram 2 below. Furthermore,
Diagram 2 also shows that earnings are expected to growth through Q4 of 2009 (projected earnings in green text).
Diagram 2 - AMED Earnings per Share 2003-2009
Source: Thomson Baseline
Diagram 3 provides a graphical representation of historic and projected earnings growth that shows the steady
upward trend of both historic and future earnings.
AMED Buy Recommendation 5
Diagram 3 - Graphical Representation of Historic and Projected Earnings
Source: Thomson Baseline
As seen from Diagram 3, Baseline estimates AMED’s long term future earnings growth rate to be 20%.
However, it should be noted that this estimate is an average of higher growth rates in the near future and
lower growth rates as the company begins to experience diseconomies of scales and market saturation.
Thus, this a 20% earnings growth increase over the next year a conservative estimate in light of (1)
recent acquisitions that should contribute significantly to raising EPS, (2) the increased demand from
aging baby boomers, and (3) independence from trends in the overall market. This report will conduct
valuation analyses using this conservative earnings growth rate of 20%. In conclusion, past trends of
high earnings growth are likely to continue as a result of AMED’s aggressive pursuit of acquisitions and
its growth-oriented corporate culture. Recognition of this fact accounts for recent upgrades of Amedisys’
stock by analysts as seen in the Yahoo!Finance charts below.
AMED Buy Recommendation 6
Market Overview
This past year has been one of the most turbulent in the history of the market. Problems originating in the credit
markets (first showing up in the area of sub-prime mortgages) have contributed to a severe market decline
throughout 2008. As of market close October 16th, 2008, the DOW, S&P, and NASDAQ are down -35.4% (Chart
2), -38.6%, and -38.5% respectively.
Chart 2 – DOW Jones Basic Chart – 1 Year Range
As the housing bubble burst and Americans began foreclosing on their home loans, many mortgage-backed assets
immediately declined in value. This had an immediate adverse affect on the balance sheets of investment banks.
As high-value investors began removing their funds from investment banks, many faced bankruptcy. Although
Bear Stearns Cos. managed to avoid bankruptcy, Lehman Brothers succumbed to it on September 15th, 2008 when
it filed for Chapter 11 bankruptcy. Realizing that allowing Lehman to go under was a mistake, the Federal
Reserve and Treasury pumped money to save Freddie Mac, Freddie Mae, and American International Group Inc.
(AIG). Shortly after these bailouts, Congress passed a bill that appropriated $700 billion to purchasing illiquid
assets such as troubled mortgages.
This $700 billion aid package might finally clean up the balance sheets of many banks and allow banks to start
making loans again to consumers and businesses (which would enable these entities to expand and create jobs).
However, the public seems to not be convinced as Americans continue their “flight to security.” On September
17th, the interest rate on the 3-month T-bill hit a low of 0.0203% and continues to fluctuate around this record low
level. Since market movements come before actual economic fluctuations, the recent severe downturn in the
DOW suggests a prolonged recession or even depression in the near future. It should be noted that AMED has not
followed the downward spiral of the DOW. The chart below shows that, in stark contrast to the DOW, AMED’s
12 month return is a respectable 9.3%.
AMED Buy Recommendation 7
Chart 3 – Amedisys versus the DOW Jones – 1 Year Range
Chart 3 truly demonstrates AMED’s independence from overall market trends, a valuable characteristic for a
stock to have during a bear market such as the one the United States is currently experiencing.
Picture 2 - AMED Provides Speech Therapy for the Elderly
AMED Buy Recommendation 8
Industry Analysis
Graph 1 - Projected Medicare Home Health and Hospice Revenue (in billions of dollars)
Source: CBO’s March 2008 Baseline: Medicare
In 2006, the Medicare spending for home health reached $14 billion, whereas spending for hospice was $9.2
billion for a combined total of $23.2 billion. As seen in Graph 1, in 2017 the combined spending for both home
health and hospice will equal approximately $56 billion. Of this total, it is estimated that $36 billion will be
attributed to home health and $20 billion to hospice. The reason for this large projected increase in Medicare
spending can be attributed to the aging baby boomers (people born following WWII during the years 1946 and
1964). As baby boomers age, health-related expenditures in the form of Medicare expenditures are expected to
skyrocket (Figure 1).
It should be emphasized that AMED has positioned itself very well vis-à-vis its competitors to take advantage of
these aforementioned trends. Although its primary competitor, Gentiva Health Service Inc. (GTIV), currently
AMED Buy Recommendation 9
surpasses AMED in total revenue, GTIV has recently sold off some of its branches. This fact, coupled with
AMED’s almost monomaniacal focus on growth suggests that AMED will shortly surpass GTIV as the largest
provider of home health and hospice services. The market seems to recognize this growth potential as AMED has
risen 42.5% over the past year, whereas GTIV has risen only 22.7% over the same period (Chart 4).
Chart 4 - AMED versus Primary Competition – GTIV (Gentiva Health)
Although AMED’s performance is close to that of GTIV YTD, both of these companies have performed superior
to other companies in the industry. This is evident in the fact that AMED’s performance greatly exceeds that of its
industry, highlighted by Chart 5.
Chart 5 - AMED versus Health Services Industry (HCSVS)
Source: Thomson Baseline
AMED Buy Recommendation 10
Risks Associated with AMED
One of the primary risks associated with AMED is the fact that its revenues are substantially derived from
Medicare. Thus, reduction in Medicare rates, rate increases that do not completely cover cost increases, and
significant changes to the Medicare reimbursement methodology may adversely affect AMED’s profits. There is
also the risk that if any of AMED’s agencies fail to comply with the conditions of participation in the Medicare
program, that agency could be terminated from the Medicare. During my interview with Kevin B. Leblanc,
AMED’s Director of Investor Relations, I learned that the last significant changes to Medicare guidelines were
made on January 1st, 2008 and that no other significant changes are expected over the next three years. Thus, this
dependence on Medicare will not be a significant risk over the 12-month horizon the RGIP has set for this
investment.
A second major risk involves the fact that the low-start up costs associated with home health and hospice
do not erect strong barriers to entry. It is conceivable that smaller, regional companies would be attracted by the
increased industry profits spurned by the increased demand for home health and hospice services from the aging
baby boomer population. It should be noted that although these regional companies could exert competitive
pressure on AMED and conceivably hurt their bottom line, this is unlikely to happen due to AMED’s status as
industry leader. Over the next several years, the AMED brand name will become synonymous with quality home
care and hospice and the obvious choice for most patients. Lastly, there is always the risk that AMED might face
litigation in the form of medical malpractice lawsuits.
AMED Stock Price Valuation
Using Capital Asset Pricing Model to derive the required rate of return for AMED:
RRR = RRF + β (RM – RRF)
RRR = Required rate of return
RRF= Risk free rate of return (3%)
RM = Market rate of return (11%)
Β = Beta (1.05)
RRR = 3% + 1.05 (11% - 3%)
RRR = 11.4%
Holt’s Model
(P / E) g
( P / E ) ng
⎛ 1 + E g + Dg ⎞
⎟
=⎜
⎜1+ E + D ⎟
ng
ng
⎝
⎠
T
( P / E ) g = Price to earnings ratio of the firm
( P / E ) ng = Price to earnings ratio of the select benchmark
E g = growth rate of the firm
Dg = dividend yield of the firm
Eng = growth rate of the select benchmark
Dng = dividend yield of the select benchmark
AMED Buy Recommendation 11
Industry Benchmark:
Competitor Benchmark:
Health Care Services (HCSVS)
Gentiva Health Services (GTIV)
P/E = 18.5
E = 17%
D = 0.1%
P/E = 18
E = 16%
D = 0%
Pessimistic Scenario
10% EPS growth
PE AMED ⎛ 1 + (.10) + 0 ⎞
=⎜
⎟ = 0.9394
PE HCSVS ⎝ 1 + .17 + 0.001 ⎠
1
Pessimistic Scenario
10% EPS Growth
PE AMED ⎛ 1 + (.10) + 0 ⎞
=⎜
⎟ = 0.9483
PEGTIV
⎝ 1 + .16 + 0.00 ⎠
1
AMED Fair P/E = (0.9483)(18) = 17.07
AMED EPS FY = 3.48
Price FY = $59.40
Fair Value = $59.40/(1+.114) =$53.32
AMED Fair P/E = (.9394)(18.5) = 17.38
AMED EPS FY= 3.48
Price FY = $60.48
Fair Value = $60.48/ (1+.114) = $54.29
Moderate Scenario
20% EPS Growth
PE AMED ⎛ 1 + (0.20) + 0 ⎞
=⎜
⎟ = 1.0248
PE HCSVS ⎝ 1 + .17 + 0.001 ⎠
1
AMED P/E = (1.0248)(18.5) = 18.96
AMED EPS FY = 3.48
Price FY = $65.98
Fair Value =$65.98/(1+.114) = $59.23
Moderate Scenario
20% EPS Growth
PE AMED ⎛ 1 + (0.20) + 0 ⎞
=⎜
⎟ = 1.0345
PE GTIV
⎝ 1 + .16 + 0.00 ⎠
1
AMED Fair P/E = (1.0345)(18) = 18.62
AMED EPS FY = 3.48
Price FY = $64.80
Fair Value = $64.80/(1+.114) =$58.17
Optimistic Scenario
30% EPS Growth
PE AMED ⎛ 1 + (.30) + 0 ⎞
=⎜
⎟ = 1.1102
PE HCSVS ⎝ 1 + .17 + 0.001 ⎠
1
AMED Fair P/E = (1.1102)(18.5) = 20.54
AMED EPS FY = 3.48
Price FY = $71.48
Fair Value = $71.48/(1+.114) =$64.17
Average Fair Value (HCSVS): $59.23
Optimistic Scenario
30% EPS Growth
PE AMED ⎛ 1 + (.30) + 0 ⎞
=⎜
⎟ = 1.1207
PEGTIV ⎝ 1 + .16 + 0.00 ⎠
1
AMED Fair P/E = (1.1207)(18) = 20.17
AMED EPS FY = 3.48
Price FY = $70.19
Fair Value = $70.19/(1+.114) =$63.01
Average Fair Value (GTIV): $58.17
Overall Average Fair Value, P*: $58.70
Total Expected Return: 10.73% (Amount Undervalued) + 11.4% (RRR) = 22.13%
Implied P/E Model:
P ⎛1
1 ⎞ g
1
+
=⎜ −
⎟
E ⎝ r ROE ⎠ r − g r
r = required rate of return
ROE = return on equity
g = sustainable growth rate
P/E = implied P/E of the stock
1 ⎞
0.095
1
P ⎛ 1
+
=⎜
−
⎟
E ⎝ 0.114 0.1648 ⎠ 0.114 − 0.095 0.114
P
= 22.28
E
AMED Buy Recommendation 12
P* =
P
* EPSTTM
E
P* = 22.28 * 2.78
P* = $61.94
Total Expected Return: 16.85% (Amount Undervalued) + 11.4% (RRR) = 28.25%
Note: The sustainable growth rate of 9.5% is a conservative estimate. The aging of the baby boomer population will lead to
increased demand and thus high sustained growth over the next 30 – 40 years.
Recommendation
In short, both the Holt’s Model and Implied P/E models yielded fair value estimates that
exceeded AMED’s recent price, indicating that AMED is currently undervalued. Using a required rate of
return of 11.4%, the Holt’s Model suggested that AMED is currently 10.73% undervalued (with a total
expected return of 22.13% over the next 12-months), whereas the Implied P/E model suggested that
AMED is currently 16.85% undervalued (with total expected return of 28.25% over the next 12 months).
The assumption made in the Holt’s model of 20% earnings growth over the next 12-month period is
actually a conservative estimate. The recent acquisition of TLC Health Service Inc. added 92 home
health and 11 hospice agencies located in 22 states and the District of Columbia. This acquisition, along
with the other minor acquisitions, will add significantly to AMED’s bottom line. AMED is a safe
investment: demand for home health services and hospice services will actually increase as the economy
enters into a recession due to the inelastic and increasing demand from the aging baby boomer
population. Finally, AMED’s has a strong and sustainable competitive selling point: Receive the best
medical treatment around in the comfort of your own home and at a fraction of the cost. Although
barriers to entry into this industry are low, AMED will benefit from first-mover advantage. Over the
next 12-month period, as AMED becomes first to dominate their industry and heightens brand
recognition, AMED will be the brand people go to for quality home health and hospice services. In
short, Amedisys is a stock that will grow significantly over the upcoming 12-month period despite the
upcoming economic recession. I strongly recommend that the Roland George Investments Program
purchase 900 shares of Amedisys Inc. (AMED).
Bibliography
Wilton, Bill. Zachs Investment Research. 8 Oct 2008. http://www.zacks.com/commentary/8814/Amedisys+Inc.++Aggressive+Growth+-+Zacks+Rank+Buy
AMED 2007 Annual Report
AMED 10-Q Report. Filed July 29th, 2008 (Period: June, 30, 2008).
Interview with Kevin B. LeBlanc. Director of Investor Relations. 16 October 2008.
Thomson Baseline
Yahoo!Finance
Finance.google.com
Reuters/Bridge
AMED Buy Recommendation 13
Appendix – AMED Financial Statements (Source: Thomson Baseline)
Balance Sheet
AMED Buy Recommendation 14
Income Statement
Statement of Cash Flow