(AMSG) AmSurg Upgraded to Neutral

Recently, we upgraded AmSurg Corporation (AMSG) to Neutral with a target price of $27.00.

AmSurg witnessed a 7.3% year-over-year decline in EPS to 38 cents in the first quarter of fiscal 2011, but it was in line with the Zacks Consensus Estimate.

Several challenges such as reimbursement issues, higher interest expenses and tax rate as well as economic uncertainty resulted in deferred elective procedures coupled with reduced doctor visits by patients, thereby lowering surgical volume. As a result, the company witnessed mounted pressure on same-center revenues. The company also recorded continued soft same-center procedural volume during the quarter.

AmSurg reported a 6% year-over-year growth in revenues during the quarter. This was primarily driven by the inclusion of nine new centers since the first quarter of 2010 through acquisition and development, increased economies of scale and operating efficiencies.

Demand for lower risk, high volume surgical procedures performed by ambulatory surgery centers (ASCs) accelerated, consistent with the demographics of an aging US population. Government agencies have been undertaking initiatives to curtail healthcare expenditures, which are resulting in a shift toward ASCs from traditional hospitals.

Earlier, in April this year, the company entered into a definitive merger agreement with National Surgical Care (NSC). NSC operates 16 multi-specialty centers and 2 gastroenterology centers with consolidated revenues of $124.5 million. AmSurg expects this transaction to close by the end of the second quarter of 2011. We expect this deal to be accretive for the company’s growth prospect.

Moreover, with a relatively solid development and acquisition pipeline in place, supported by a strong cash position, AmSurg is well placed to carry out suitable acquisitions.

We expect AmSurg to benefit over the long term from favorable industry dynamics. For the past few years, government programs, private insurance companies and managed care organizations have implemented various cost-cutting measures to limit the growth of healthcare expenditures. Ambulatory surgery is generally less expensive than hospital-based surgery due to lower facility development costs, more efficient staffing and space utilization.

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