AmSurg Downgraded to Neutral

Recently, we downgraded AmSurg Corporation (AMSG - Analyst Report) to Neutral with a target price of $27.00.

In the face of headwinds such as reimbursement issues, higher expenses and tax rate, AmSurg missed the Zacks Consensus Estimate on both the EPS and revenue front. During the quarter, AmSurg reported EPS of $0.42, missing the Zacks Consensus Estimate by $0.01. Although revenues increased 11% year over year to $195.9 million, it was below the Zacks Consensus Estimate of $200 million.

Challenges such as reimbursement issues, higher expenses and tax rate affected the company’s financials. Besides, the prevailing economic uncertainty led to lower doctor visits as well as deferred elective procedures affecting surgical volume. As a result, the company witnessed mounted pressure on same-center revenues.

These headwinds continued to put margins under pressure. Operating expenses during the quarter surged 13.1% year over year due to higher salaries and benefits (up 14.0%), supply cost (up 9.8%) and other operating expenses (up 17.5%). This resulted in a 130 basis point decline in operating margin to 30.4%. Accordingly, we have lowered our revenue and EPS estimates for 2011 by $10 million (to $777 million) and $0.02 per share ($1.67), respectively.

However, AmSurg has been able to deliver strong growth in revenues, primarily driven by the addition of several new centers through acquisitions and development of ambulatory surgery centers (“ASCs”). Demand for lower-risk, high-volume surgical procedures performed by ASCs continue to grow, consistent with the demographics of an aging US population. Government agencies have been undertaking initiatives to curtail healthcare expenditure resulting in a shift toward ASCs from traditional hospitals.

In September 2011, the company acquired National Surgical Care (NSC) along with its 15 multi-specialty centers and 2 gastroenterology centers with consolidated revenues of $124.5 million. In addition to the NSC acquisition, the company acquired two other centers during the quarter and disposed of one center. We expect these deals to be accretive to the company.

Moreover, with a strong cash balance and extended revolving credit facility, AmSurg is well poised to venture into further acquisitions that will boost its top line going ahead. The company is even looking for potential large-chain 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 healthcare expenditure. Ambulatory surgery is comparatively less expensive than hospital-based surgery due to lower facility development costs, more efficient staffing and space utilization.

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

Read the full analyst report on AMSG