(AMSG) AmSurg Corporation Shares Remain Neutral

We have reiterated our Neutral recommendation on AmSurg Corporation (AMSG) with a target price of $31.00.

Even amid headwinds like reimbursement issues, higher expenses and economic uncertainty, AmSurg reported earnings per share (“EPS”) of 49 cents in the third quarter of 2012, up 9% compared with the year-ago quarter’s adjusted EPS of 45 cents. Reported EPS was in line with the Zacks Consensus Estimate and remained at the higher end of the company’s guidance range of 47?49 cents.

AmSurg has also been able to deliver satisfactory progress with several quarters of double-digit sales growth. During the quarter, revenues increased a robust 16% year over year to $226.4 million. This was primarily driven by the addition of several new centers through acquisitions and the development of additional ambulatory surgery centers (ASCs). The centers which were acquired/opened in 2011 and 2012, contributed a respective of $25.6 million and $1.2 million of additional revenues during the reported quarter.

We are also encouraged to note that during the quarter there was a 2% rise in same-center revenues (even with one less business day in the quarter), which was preceded by 3% growth in the second quarter. This was the sixth consecutive quarter of increase based on which the company adjusted its same-center revenue growth forecast to 3% from the previous guidance of 2%?3%.

Moreover, with a strong cash balance and revolving credit facility, AmSurg is well poised to pursue further acquisitions that will boost its top line going ahead. The company is even looking for potential large-chain acquisitions.

We are also encouraged to note that many physicians prefer ASCs because these centers provide greater scheduling flexibility, more consistent nurse staffing and faster turnaround time between cases, allowing them to perform more surgeries in a specified time period.

Moreover, ambulatory surgery is comparatively less expensive than hospital-based surgery due to lower facility development costs, more efficient staffing and space utilization. We expect all these factors to work in favor of the company.

However, economic uncertainty together with unemployment led to fewer individuals enjoying company-provided insurance, which impacted elective procedures such as hip and knee replacements, as well as screening procedures such as colonoscopies. Further, ASCs are highly dependent on third-party reimbursement programs including governmental and private insurance programs to pay on behalf of patients.

We have concerns regarding AmSurg’s dependency on Medicare for payments, given that the company derived 28% of its revenues from governmental healthcare programs, primarily Medicare, during the past nine months. Moreover, AmSurg has been facing significant margin compression in the last few years. Besides, the competitive landscape is tough with the presence of players such as HCA Holdings, Inc. (HCA).

Presently, AmSurg has a Zacks #3 Rank (short-term Hold rating).
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