Tuesday, December 21, 2010

Amedisys (NASDAQ:AMED): Upgrade to Buy: risk/reward is good - Deutsche Bank

Deutsche Bank's Specialty Health Care Services team is upgrading Amedisys (NASDAQ:AMED) to Buy from Hold this morning with a $39 price target (prev. $31).

After sitting on the sidelines for the past 24+ months on AMED (DBAB moved to Hold on November 20, 2008), the firm is upgrading their opinion on the shares to Buy based on belief that the risk/reward is compelling on the upside. While they believe consensus estimates still remain too high for 2011, they see limited downside risk to AMED shares, which are trading at 4.7x their (Street-low) 2011E EBITDA and 9.7x their (Street-low) 2011E EPS. On the upside, DBAB believes AMED's fundamentals should stabilize due to recent restructuring efforts, and they believe its shares are poised to recover after having lagged DBAB coverage universe by 4,900 bps (49%) YTD. Firm sees 33% upside potential to AMED shares over the next 12 months based on their target price of $39, which they’ve increased from $31. Within DBAB coverage universe, AMED sports the absolute lowest valuation on an EV/EBITDA basis.

Street 2011 EPS remains too high, but buy-side likely discounting consensus. DBAB's sense is that the buy-side has disregarded much of the sell-side forecasts as being too optimistic. And so they are comfortable putting a Buy recommendation on AMED – even despite the fact that their 2011 EPS of $3.01 sits 15% below consensus. For 2012, DBAB is establishing EPS of $3.50 or +16% Y/Y. Their 2012 model as assumes -2% pricing (+2.5% MB offset by PPACA cut and case mix creep adjustment), +5% volume growth and 100 home-based branch acquisitions. Firm figures M&A will accelerate in 2012, following a more modest pace in 2011 once its operations sufficiently stabilize.

Risk profile remains high due to investigations, but risk/reward compelling. DBAB acknowledges that AMED’s ongoing investigations could limit the “appetite” for the equity by some investors over the near/medium-term; however, they are drawn to AMED shares at current valuation levels because of the risk/reward. Firm's price target of $39 equates to 5x 2012 EV/EBITDA, while a DCF-based valuation approach supports a share price even higher. Even if AMED’s investigations were to lead to some financial culpability, though, they believe it’s relatively modest net leverage (0.25x) and strong FCF (~$90M in 2011E) provide for good financial flexibility. If AMED’s fundamentals begin to stabilize over the coming quarters, they believe upside (to their price target) will approach 33% over the next 12 months.

Risk profile remains high due to investigations, but risk/reward compelling. Firm acknowledges that AMED’s ongoing investigations could limit the “appetite” for the equity by some investors over the near/medium-term. The most important of these investigations, in their view, is the ongoing Civil Investigative Demand process that was initiated by the U.S. Department of Justice pursuant to the False Claims Act. AMED’s other investigation matters include an ongoing Securities and Exchange Commission (SEC) investigation and a Senate Finance Investigation that was launched earlier in 2010. Despite these investigations and the potential for real financial culpability if any wrongdoing is determined, they are drawn to AMED shares at current valuation levels because of the absolute risk/reward. Their price target of $39 equates to just 5x 2012 EV/EBITDA, while a DCF-based valuation approach supports a share price even higher. DBAB's DCF-based valuation model yields a range of valuations in the $55-$60 level assuming a WACC of 8%, growth of 5% from 2013-2020 at a 10% EBITDA margin and a terminal growth rate of 2%.

Notablecalls: This may prove to be a significant call. Here's why:

- The sentiment in Amedisys (AMED) is undoubtedly negative. The name saw a wave of downgrades back in July when the SEC/CMS investigation issues surfaced. The stock has been cut in half this year and has actually failed to move down from the downgrade levels.

- There is only one other (real) firm out there with a Buy on AMED. It's Oppenheimer and they have a $44 price target. No tier-1 firms until Deutsche's upgrade today. Hell, this thing hasn't seen an upgrade since 2009.

- Deutsche has Street cred. as they have been on the sidelines for almost 2 yrs.

- Short interest stands at over 20%. That's a lot.

- If you look at AMED peers AFAM & LHCG both are up 30-40% from July lows. It may be time for AMED to play some ketchup.

- If you read the note, notice how conservative DBAB actually is with their below-consensus estimates & a price target they claim may be way too low. They are saying there may be upside to the current $39 price target in the next 12 mts.

- Chart looks good for a bounce & AMED sure is a mover.

I think we may have a winner here. I think AMED sees $31+ today. May see $32+ in the coming days. If you look at the chart you'll see that when they get it going the stock is prone to move several (3-4 pts) at a time.

One to watch for sure.

1 comment:

bl said...

Good 8:40 call!