AmSurg Remains Neutral

We have reiterated our Neutral recommendation on AmSurg Corporation (AMSG - Analyst Report) with a target price of $30.00.

Even amidst headwinds like reimbursement issues, higher expenses and economic uncertainty, AmSurg’s adjusted EPS for the first quarter of fiscal 2012 came in at 50 cents, up 35% year over year, and ahead of the Zacks Consensus Estimate by 2 cents.

AmSurg also delivered strong revenue growth during the reported quarter. Revenues were up 30% year over year to $230.2 million and exceeded the Zacks Consensus Estimate of $219 million.

This was primarily driven by the addition of several new centers through acquisitions and development of additional ambulatory surgery centers (ASC). Demand for lower risk, high volume surgical procedures performed by ASCs grew steadily during the quarter, consistent with the demographics of an aging US population.

Moreover, with the National Surgical Care (NSC) acquisition last year, AmSurg diversified its business to include orthopedics andmulti-specialty centers and expanded its portfolio to 46 multi-specialty centers, the largest in this space.

Meanwhile, we are encouraged by the company’s same-center growth of 5% in the quarter (2% of this was due to a mild weather) primarily due to a significant increase in patient visits. The same-center sales continued to grow for the past one year and the reported quarter represented the best same-center performance since 2007.

On the back of solid same-center performance during the quarter, the company increased its same-center revenue guidance to 1%−3% from the previous guidance of 0%−2% for 2012.

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 to work as the major catalysts for the company to increase its foothold in the ambulatory surgery space.

However, economic uncertainty together with unemployment lead to fewer individuals enjoying company-provided insurance, which impacts 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 remain concerned regarding AmSurg’s dependency on Medicare for payments, given that the company derived 29% of its revenues from governmental healthcare programs, particularly Medicare, during fiscal 2011.

Also, for the past few years, government programs, private insurance companies and managed care organizations have implemented various cost-cutting measures to limit healthcare expenditure. Moreover, competitive landscape is tough with the presence of players such as HCA Holdings, Inc. (HCA - Snapshot Report).

Presently, AmSurg has a Zacks #2 Rank (short-term Buy rating). Considering the fundamentals of AmSurg, we remain Neutral on the stock over the long term.