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Home healthcare provider Amedisys Inc. (AMED - Analyst Report) recorded adjusted net loss per share of 1 cent in the third quarter of 2013, after adjusting for the U.S. Department of Justice settlement, proceeds from D&O insurance in the reported quarter and certain other items in both the periods.

The result registered a massive decline from adjusted earnings of 28 cents in the year-ago quarter. Apart from the decline in top line, margin contraction and higher share count led to the earnings downfall. As per management, the lower volume environment in both home health and hospice, along with higher costs, primarily in home health, adversely affected the company’s overall performance during the quarter. The result also lagged the Zacks Consensus Estimate of earnings of 14 cents.

Quarter in Detail

Amedisys primarily derives revenues from its home health and hospice agencies. Third-quarter net service revenues came in at $301.6 million, down 17.2% year over year. The significantly low volume in its segments hurt revenues by about $15 million. Revenues also trailed the Zacks Consensus Estimate of $310 million.

For the company’s Home Health division, net service revenues were $262.6 million (up 4.7% year over year), with Medicare revenues of $213 million and non-Medicare revenues of $49.6 million in the quarter. However, home health revenues declined sequentially mainly due to lower admissions. Admissions were down 5% sequentially.

For the hospice division, net service revenues were $66.6 million (up 1.9% year over year) including Medicare revenues of $62.8 million and non-Medicare revenues of $3.8 million in the quarter. Sequentially, hospice revenues have declined on account of impact on admission volume from the removal of debility and the failure to execute diagnosis as per CMS guidelines.

Amedisys exited the quarter with cash and cash equivalents of $43.6 million compared with $14.5 million at the end of 2012. The company’s long-term obligations (including current portion) were $70.9 million compared with $102.7 million at the end of 2012. Net cash provided by operating activities in the quarter was $27.9 million, up 28.1% year over year.

Outlook
 
Following another weak quarter, Amedisys tweaked its sales guidance for 2013. Net service revenues are expected in the range of $1.24–$1.25 billion compared with the prior guidance of $1.24–$1.28 billion. The Zacks Consensus Estimate of $1.26 billion lies outside the revised guidance.

The company also envisages earnings per share for 2013 in the range of 20 to 25 cents, a huge slash from the earlier range of 45 to 55 cents. The Zacks Consensus Estimates of 56 cents for 2013 lies way ahead of the outlook band.

Our Take

Amedisys posted another weak quarter with sustained volume pressure. Accordingly, it missed the Zacks Consensus Estimate on both fronts. It is of serious concern that this marks the fifth consecutive quarter of top-line miss by Amedisys. We believe that poor segment performance, sluggish growth trend and the adverse impact from sequestration led to the dismal third-quarter results. The lowered guidance for 2013, which lies below our projections, also fails to inspire confidence.

We believe that the highly uncertain home nursing reimbursement environment, coupled with significant reduction in Medicare reimbursement in the recent past has affected Amedisys’ performance over the past few quarters. We expect the healthcare reimbursement pressure to persist for the rest of 2013 and continue in 2014, thereby weakening the company’s performance further.

Accordingly, we prefer to avoid Amedisys. The stock carries a Zacks Rank #3 (Hold). On the other hand, medical sector stocks worth considering areAlign Technologies Inc., (ALGN - Analyst Report), Cardinal Health, Inc. (CAH - Analyst Report) and Mindray Medical International Limited (MR - Analyst Report). These stocks carry a favorable Zacks Rank #1 (Strong Buy).

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