If that isn’t the back drop for a value stock and magic formula candidate, I don’t know what is. It’s the type of back drop that creates a “sell first, investigate later” mindset… a mindset value investors can swoop in and take advantage of. It’s the type of backdrop we look for at Gurufocus’s own Microcap Magic Formula Newsletter.
The company is Amedisys (AMED). Much like fellow home magic formula stock Almost Family (AFAM), Amedisys operates in the home health care sector. They provide long-term care to patients (mainly elderly) recovering from a period of specialization.
The set up is basically a win for all parties involved. After a surgery, patients have three options — utilize a home healthcare service, go to a long term hospital, or move into a nursing home. For patients, using home healthcare is much more comfortable and allows them to stay in their home and avoid the (often unpleasant) nursing home environment. For the government, caring for a patient with home healthcare costs 1/10 of the cost for putting them up in a hospital. For AMED, they get to make steady, mouthwatering profits.
Why is it so cheap?
So AMED has found a niche that has a huge advantage over all of the other substitutes. In addition, it’s benefiting from huge demographic trends (the aging of the baby boomers) that should drive massive increases in the demand for its service.
So why the heck is it trading for under 10 times earnings?
First, the company missed analyst expectations in its latest quarter and cut guidance. Analysts haven’t been able to back away from the company quickly enough after that.
Second, a big chunk of the mandatory budget cuts in the new budget deal comes from Medicare. That cut could put a serious crimp in Amedisys’s revenues. It creates uncertainty…. And Wall Street hates uncertainty.
So we’ve already mentioned Amedisys is trading for under 10 times earnings. But simple P/E ratios can be distorted and manipulated by a lot of things. So is Amedisys really that cheap?
No, it’s not… Amedisys is actually much cheaper.
Amedisys is currently trading for just over $20 per share and has net debt of approximately $5 per share, for a total EV of $25 per share. On a trailing twelve month basis, they’ve earned $6.08 per share in EBITDA and a bit over $4.81 in EBIT. In other words, they’re trading for about four times EBITDA and a shade over five times EBIT.
And these aren’t one time profitability spikes either. As a matter of fact, it’s a bit on the lower end of their earnings range- ebitda and ebit have both come in at or above these levels in each of the past three years.
What about on a cash flow basis? After adjusting for acquisitions, they’re trading for around 5 times EV / free cash flow.
Speaking of acquisitions, Amedisys just completed a big one. Obviously, acquisitions can be dicey…. But the numbers we mentioned above only reflect Amedisys’ past performance. Given they paid cash for the acquisition (no shareholder dilution) and the business has positive earnings, the new business should only add to earnings. Will it prove to be a good acquisition? That’s anyone’s guess… but it certainly won’t detract from the numbers mentioned above, and (hopefully) should add to them.
By the way, that big acquisition Amedisys did valued the company they acquired at about 1.5x EV/Sales. Most transactions in this space have taken place between 1-1.5x EV/Sales. Amedisys currently trades for around 0.5 times EV/Sales.
Returns on capital
So Amedisys is definitely cheap… but are they a good business?
If the past is any indication, then, without question, yes.
Amedisys has grown through significant acquisition, so it’s hard to pinpoint an organic growth rate. But their growth has been astronomical, and they have done it at mouthwatering rates of return.
Return on tangible assets (which we define as EBIT/Tangible Assets) started off the decade at around 20%.
That’s no small feat!!!!
But they’ve actually accelerated throughout the decade, as Amedisys realized synergies from all their acquisitions. Returns peaked in fiscal 2009 at over 70%. They’ve drifted down a bit from there, coming in at a measly 37.5% in the trailing twelve months. That’s only better than 90% or so of the S&P 500.
I’ll wrap this up similar to Almost Family’s write up. Amedisys certainly has some risk. There are, without questions, some near-term headwinds, and the headline risks are very, very real. But this is a business that can save the government significant amounts of money and provide better service to patients. Long term, there is no doubt demand for their service will go up. And the company has a proven history of generating great returns. As part of a basket of magic formula stocks, Amedisys makes a wonderful addition with some serious upside.