We recently reiterated our Neutral recommendation on AmSurg Corporation (AMSG) with a target price of $18.00.
AmSurg’s reported an EPS of 43 cents during the second quarter of fiscal 2010 which surpassed the Zacks Consensus Estimate by a penny. However, earnings were lower than 45 cents reported in the year-ago period.
Revenues were $179.9 million, meeting the Zacks Consensus Estimate and 7% higher than $168.8 million in the year-ago period. The current economic uncertainty is taking its toll on the company, which resulted in a 2% decline in same-center revenues. Although the company’s plan to open 13−16 new centers remains unchanged, same center revenues are expected to decline 1%−2% in 2010.
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.
Usually, economic uncertainty makes people trim their expenses on discretionary procedures such as colonoscopy screening and cataract surgery. Economic uncertainty is lowering physician visits, thereby reducing surgical volume. However, management has indicated that about 80% of its gastrointestinal procedures are for specific problems, and may not be considered discretionary. This insulates the company from the economic downtrends to some extent.
We are also concerned about AmSurg’s dependency on Medicare for payments given that the company derived 32% of its revenues from governmental health care programs, primarily Medicare during the first half of 2010. This program is subject to the changes in federal government funding, which historically have been difficult to predict.
The revised payment system (effective January 2008) resulted in a significant reduction in the reimbursement rates for gastroenterology procedures, which in 2009 accounted for about 66% and 79% of revenues and total procedures performed at the centers, respectively. Accordingly, the company’s EPS was negatively impacted in 2008 by 5 cents and an additional 7 cents in 2009. Based on the reimbursement rates for 2010, which included a 1.2% CPI increase, net earnings in 2010 are estimated to be hit by 6 cents compared to 2009.