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Amedisys Down on Dismal Quarter, Reimbursement Headwind

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On Dec 8, we issued an updated research report on Baton Rouge, LA-based Amedisys Inc. (AMED - Free Report) . The company provides home health and hospice services throughout the U.S. to a growing chronic, co-morbid and aging population.

Over the past three months, Amedisys underperformed the Zacks categorized Medical-Outpatient/Home Care industry with respect to price performance. Of late, the stock’s share price return worsened further when Amedisys released unimpressive third-quarter 2016 numbers.

Escalation in operating expenses and margin contractions continue to raise concern. Further, CMS’ recently proposed Home Health rule in 2017 proved grossly unfavorable for Amedisys, indicating gloomy reimbursement scenario ahead. Per the last trading price, overall the company lost 12.9%, as against 4.8% gain of the broader industry over the last three months.

Estimate revision trend also remains strictly negative for the full-year 2016 with all six downward revisions over the past couple of months. Earnings estimates for the current year accordingly dropped a significant 12.3% to $1.50 per share.  In absence of any positive catalyst to revive growth, we expect slim chances of recovery any time soon.

We are also concerned about Amedisys’ intensifying competition from local privately and publicly-owned and hospital-owned health care providers. Since the market for home health and hospice is fragmented with a number of small local providers, there are only a few barriers to entry in this market. The competition is based on the availability of personnel, the quality of services, expertise of visiting staff and the price of services.

On a positive note, in Home Health, the company witnessed strong organic growth in Medicare and non-Medicare revenues. We are also upbeat about the company’s initiative for strategically fit merger and acquisition activities.

In line with this strategy, the company has closed the acquisition of Professional Profiles in Massachusetts. Currently, the company is working on additional opportunities for personal care tuck-in acquisitions in the Massachusetts and Southern New England markets and is also aiming to expand this platform in other states, particularly Florida, Tennessee and Pennsylvania where it has a strong Home Health and Hospice presence. The company’s strong cash balance position further bolsters our confidence in the stock.

The company is also expected to benefit from the aging demographics of the U.S. population and the need for higher acuity patients to be taken care of in a home nursing environment.  In addition, with rising demand of healthcare services in the U.S., we believe Amedisys will continue to benefit from increased volume shift from higher-cost institutional settings to a lower-cost environment such as home health.

Zacks Rank & Key Picks

Amedisys currently carries a Zacks Rank #3 (Hold). Some better-ranked medical stocks include NxStage Medical Inc. , Baxter International Inc. (BAX - Free Report) and Bovie Medical Corporation . NxStage Medical and Baxter International sport a Zacks Rank #1 (Strong Buy), while Bovie Medical carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

NxStage Medical surged 33.8% over the last one year compared with the S&P 500’s 12.3% growth over the same period. The company has a four-quarter average positive earnings surprise of 46.3%.

Baxter International rallied 21.7% over one year, much higher than the S&P 500. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 125.5% gain in the past one year, way better than the S&P 500. The company has a trailing four-quarter positive average earnings surprise of 28.7%.

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