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Anh Hoang
Anh Hoang
Articles (264)  | Author's Website |

AMED: Investment Opportunity When the Price Hits an 8-Year Low

December 27, 2011 | About:

The healthcare sector has experienced the widespread downward in the majority of company’s stock prices. Around a week ago, I posted a quick analysis on the heavily leveraged health care operator named Community Health System (NYSE:CYH). And the same price trend is happening for Amedisys (NASDAQ:AMED), the home health services to the chronic, co-morbid, aging American population. At the bottom of the market in 2009, AMED got shot down from $63 to $28, then bouncde right back up to $60 per share a year later. And from that time until now, it kept going down, staying at the equivalent level of December 2003, at around $11 per share.


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.

Usd millions 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
OCF 8 11 22 30 44 43 93 151 248 206
FCF -6 10 20 24 23 14 64 122 211 142

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.

About the author:

Anh Hoang
Money manager in global equities, especially in U.S. and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam.

Visit Anh Hoang's Website

Rating: 3.3/5 (21 votes)


Paulwitt - 6 years ago    Report SPAM
no thanks, I'll wait until someone deciphers our new national health care plan

Achitpatel - 6 years ago    Report SPAM
Nice post. I think the industry (home health) has been unduly affected by Medicare reimbursement issues.The demographics in the US point to increased utilization of nurses coming to patients homes to extend care that chronic health issues require. This is actually a very cost effective way to provide care compared to in-patient therapy. The valuations in the industry seem to have factored in the uncertainty of reimbursement from Medicare. My favorite in the group is AFAM, which carries very little debt, and management who seem to have a long term perspective.
Hoang Quoc Anh
Hoang Quoc Anh - 6 years ago    Report SPAM
Thanks Paul and Achitpatel.

The policy is always uncertain, and unknowable, and the whole industry are priced like disaster. The most important thing to select out the good and sound firm to go along with it so it can sustain in any environment.

The most worrisome item is the goodwill it carries on its balance sheet, and some firms has written it down, bringing shares to the new low level. The smaller goodwill, the better I feel, and after it had written the goodwill to the ample level and it might be nice to initiate the position.

Achit: you can have a look at my analysis on AFAM here: http://www.gurufocus.com/news/155514/almost-family-the-magic-formula-stock-is-getting-cheaper-and-cheaper
Dr. Paul Price
Dr. Paul Price - 6 years ago    Report SPAM


Why not simply eliminate goodwill from your calculations completely?

Writing it down is a non-cash charge even if it happens later. Either the company is earning a decent return or it isn't.

Book value is pretty meaningless if it's mostly intangibles.

Make your investment decision without regard to BV and your choice becomes much easier.
Hoang Quoc Anh
Hoang Quoc Anh - 6 years ago    Report SPAM

Thanks for the comments. and sure, what investors should care about is the amount of cash generation over time, in relations to the owners capital employed. Even though the writing down good will is non-cash charges, but look at what has happened with AMED, it does not affect cashflow position, but it hurts bottom line, and the market would react accordingly, the share prices kept dropping like crazy. After goodwill written down then investors might feel safer to make the purchase.

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