But does it present an opportunity for value investors to accumulate the shares at the lowest price since 2004? Or should investor think twice before initiating any position? Let’s look at the company’s balance sheet first.
As we recognized, the main item in AMED's balance sheet is goodwill, as AMED grew its business via acquisitions, taking nearly 40% of its total assets, which could be subject to a write down at any time. Benjamin Graham often called it “water” in the old language, as it’s not a real asset. The D/A ratio is around 40%, not an alarming figure at first glance. However, we should take into account the contractual obligations, purchase obligations and operating leases to be added back to the total liabilities. The balance sheet already carried the long-term obligation less the current portion. In the next three years, AMED would have to pay out nearly $150 million for total contractual obligations, and more than $85 million in the four to five year period. And the total liabilities after adding back the purchase obligations and operating leases would be nearly $450 million.
The good thing about AMED's business is the level of operating cash flow and free cash flow generation. It experienced 10-year positive operating cash flow and nine-year positive free cash flow and both are having an increasing trend over time.
So at fiscal year 2010, the operating cash flow ratio is around 45% of the total adjusted liabilities, which is a very good and solvent figure, whereas the FCF is more than 30% over the liabilities. We can be confident in the ability to handle the solvency risks of AMED at this point in time.
Coming back to what further depressed the stock price, it might because of the two events combined: the goodwill write-off, which was expected, and the departure of its COO. On the goodwill, AMED recognized $565 million non-cash goodwill write-off as of September 2011, pushing the operating income TTM of AMED to -$434 million, and the net after taxes of -$365 million. Despite all those considered bad news, three directors of AMED bought in around $90,000 of AMED stocks in the market at the price range of $9.66-$11.75.
With the stock price at the lowest level in eight years, and with the P/CF of only 2.3x and 0.6x book, AMED is worth a second look for any value investors. It might fit in the diversified of undervalued stocks. Even though the industry risks still have pressure on the short-term performance of the stock price, the investors might be well-off with AMED when he/she is patient enough.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.
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