Stock Information Company: AmSurg Corp. Ticker
Transcription
Stock Information Company: AmSurg Corp. Ticker
Stock Information Company: AmSurg Corp. Ticker: AMSG Share Price*: $66.04 Market Cap**: $3,372m Daily Volume ($): $20.3m Recommendation: BUY 1-yr Price Target: $81.00 Downside Risk: $52 Entry: < $66 Add: < $56 Trim/Exit: $81-$86 *-closing price as of 5/14/15 **-assumes full dilution from options and preferred securities. AMSG an Awesome Beast: Sustainable Growth A Consequence of Being Awesome & a Beast Investment Healthcare reimbursements from both the government and private sector have historically proven Thesis: insufficient toward offsetting the true economic cost of patient care – a trend we believe will only be exacerbated as the Affordable Care Act (ACA) continues to roll out in stages of increasing compliance over the next several years. While the above factors will continue to create bottom-line uncertainty for healthcare companies, we view the government’s central role as a “forced buyer”. Thus at a micro-level, we believe the greatest beneficiaries of healthcare reform will be companies that possess higher economies of scale and a lower cost structure than peers to benefit from rising demand AND partially offset inherent margin pressure. Within this mold, our highest conviction idea is AmSurg Corp. Investment Highlights: AmSurg is the single largest owner and operator of ambulatory surgery centers (ASCs) in the U.S. and one of the five largest outsourced physician services (OPS) providers in the nation. As we highlight below, AmSurg’s recent acquisition of Sheridan Healthcare, as well as the company’s scale, low-cost operations, and balanced, acquisitive growth model position AMSG to take advantage of reform-driven demand as well as an implicit trend toward lower costs of patient care. Importantly, we believe this upside potential is not yet fully reflected in AMSG shares and recommend purchase at an entry price below $66/share – this represents a ~23% discount to our $81/share intrinsic value calculation over the next 12-months. Economies of Scale & Market Leadership. AmSurg is the single largest owner/operator of ambulatory surgery centers (ASCs) in the U.S. with 248 locations across 34 states and its subsidiary, Sheridan Healthcare, is one of the five largest outsourced physician services (OPS) providers in the nation with leading market share in anesthesiology (#1), emergency services, radiology (#1), and pediatrics (#2). Sustainable mid-Teens Revenue Growth from HC Reform and M&A. We believe AMSG can sustainably grow revenues by 15-20% annually, well above the ~4% long-term growth rate for healthcare services, through a mix of organic and acquisitive tailwinds, these include: 1) Reform driven demand 2) Trend toward lowering costs – an increasing number of insured lives and falling reimbursements are driving a focus on cost control. Both of AmSurg’s businesses are favorably positioned to take advantage of this trend. For instance, a surgical procedure performed at an outpatient center is typically 1/3 of the cost of the same procedure performed at an inpatient facility. More stringent mandates by CMS and managed care providers on non-life threatening procedure should drive above average volumes for ASCs. 3) Highly fragmented markets – in light of the tailwind of reform to AMSG’s organic growth profile, management presently views acquisitions as a steady supplement to its overall growth in the coming years. However, we believe the fragmentation of both the ASC and OPS market along with growing cost pressures could make acquisitions as a steady source of growth for years to come. For instance, AmSurg’s position as the largest ASC only garners the company 4% market share (248 locations vs. a total of 5,300 ASCs). Similarly, Sheridan owns less than 2% of the $65 billion OPS market despite its leading positions in anesthesiology, ER, radiology and children’s. Overlooked Synergies. AmSurg’s July 2014 acquisition of Sheridan Healthcare is anticipated to generate $2030 million of cost synergies on an annual basis. However, we believe there could be as much as $100 million of additional opportunities that are not yet reflected in consensus estimates, these include: 1) Crossover revenue streams – 95% of AmSurg’s 248 ASCs currently outsource their anesthesia needs (Sheridan’s #1 OPS offering), yet Sheridan is a service provider to less than 10 of these locations at present. We estimate that the eventual migration of this business to Sheridan could result in an incremental $63 million in profits for AMSG. 2) Pipeline for M&A and JVs – Sheridan’s OPS positioning should also serve as a great lead generator, on the ASC and OPS side, for AMSG’s acquisitive growth strategy. Sheridan generates the vast majority of its business from hospital systems and a small, but growing base of business from outpatient surgery centers (over 100 ASCs and many of them located in non AmSurg markets). ASC Partnerships/JVs with Hospital Systems Imply Upside. The treatment cost differential of ASCs versus inpatient settings and AmSurg’s market leading ASC position make the company a logical candidate for a partnership or JV for large hospital systems – management has also confirmed their openness to such partnerships if the “numbers make sense”. We estimate that the conversion of only 1 to 2 health systems per year to ASC partnerships or physician outsourcing relationships could boost new contract growth above management’s expected range of 2-3%. Exposure to Favorable Volume Demographics. AMSG is well positioned to benefit from volume growth due to increased life expectancies. The most commonly performed procedures at AmSurg include colonoscopy, cataract removal and knee and shoulder arthroscopy. In addition, the company’s ASCs, while located across 34 different states, are over-indexed to Florida, Texas, and California – each markets with high proportions of seniors. Similarly, 64% of Sheridan’s revenues are derived from Florida. Risks: Integration & Execution. Management’s ability to integrate and fully realize synergies from the Sheridan acquisition, and bolt-on acquisitions that are centric to AMSG’s growth, is the biggest risk in our view. As with other acquisitive growth stories, the integration process is not completed overnight, nor is it linear. High Leverage Profile. This is the Street’s biggest knock on the stock. AmSurg’s Debt-to-EBITDA multiple immediately after acquiring Sheridan was 5.5x. Management’s goal is to lower this ratio under 5.0x by the end of 2015 and subsequently return to its historical leverage profile of 3.5x to 4.5x. The long-term deleveraging of the business will largely be determined by the company’s ability to find accretive acquisition targets. Through 1Q15, AMSG’s leverage stood at 5.1x. Acquisition Availability. An improving economy and rising M&A multiples in the industry could lead to AMSG overpaying for OPS/ASC acquisitions or being unable to meet its 7-9% acquired growth target. We believe this risk is of medium probability in light of the recent Tenet/USPI partnership, however the highly fragmented nature of AMSG’s target markets and declining reimbursements should offer plenty of opportunity and incentive for consolidation. Repeal of the ACA. There are several impending legal challenges to the ACA that are being heard presently by the SCOTUS. An adverse ruling, while unlikely to lead to a repeal of the legislation, could be a major nearterm setback for healthcare stocks in general. This overhang is unlikely to abate until the end of 1H15 when the courts issue their final opinions. Note however, that AMSG faces low-risk relative to peers given its small self-pay and government payer mix. AmSurg and Sheridan have 25% and 23% Medicare and Medicaid payor mixes, respectively. In addition, Sheridan has only 6% private pay compared to 59% from managed care. Valuation: Amsurg Corporation Sum-of-the-Parts Valuation $ in MMs, except per share data Physician Outsourcing TeamHealth Envision Healthcare Holdings MEDNAX Average Implied EV for AMSG - Sheridan 2015E EV/EBITDA 13.6x 13.0x 12.0x 12.9x $2,978.6 Ambulatory Surgery Centers Surgical Care Affiliates 14.2x Implied EV for AMSG - AmSurg $3,287.3 Gross Enterprise Value Less: Net Debt as of 3/31/15 Implied Market Cap $6,265.9 ($2,133) $4,133.2 Implied Share Price $80.95 Amsurg Corporation Estimate & Valuation Summary $ in MMs, except per share data Current Price EPS P/E Implied Target P/E multiple $ 66.04 Adjusted EBITDA (net of Minority Interest) Equity market value Net Debt as of 3/31/15 Enterprise Value Current EV/EBITDA Implied Target EV/EBITDA multiple Target Price Upside to target price Fully Diluted Shares Out (millions) $ 81.00 23% 51.1 2014 $2.75 24.0x 29.5x 2015E $3.41 19.4x 23.8x 2016E $3.95 16.7x 20.5x 2017E $4.56 14.5x 17.8x $294 $3,372 $2,133 $5,505 18.7x 21.3x $463 $3,372 $2,133 $5,505 11.9x 13.5x $520 $3,372 $2,133 $5,505 10.6x 12.1x $596 $3,372 $2,133 $5,505 9.2x 10.5x