Summary of investments
Risky assets have been on bid since July and are now rallying to retrace losses incurred in early 2022. Within healthcare, there are many pockets of quality that are crying out for capital allocation. More specifically, the characteristics of free cash flow (“FCF”), tangible ledger value and quality of benefits are paramount.
Table 1. AMED price performance since the beginning of the year
In this vein, we note that Amedysis, Inc. (NASDAQ: AMED) shows a weak affinity with equity premia to which we seek exposure in H2 FY22. On closer inspection, the balance sheet is skewed towards intangible sources of value that are prone to depreciate and provide no certainty about the predictability of future cash flows. Valuations are also unfavorable. Given these factors, we rate AMED neutral.
Stable Q2 earnings, outlook for FY22 results
Second-quarter revenue fell 100 basis points to $558 million, below consensus estimates and below forecast. Home Health revenue was ~$350 million, with an impact of approximately 400 basis points from second quarter acquisitions. More on that a bit later. Structurally, the home healthcare sector now accounts for 20% of turnover per visit. This equates to ~200K/month of ~600K/quarter. However, management says they are moving towards a mix where more upside revenue is recognized on a case-by-case basis (instead of per visit). This has the potential to unlock scale in the segment as it frees up more clinical capacity for greater patient adoption.
Meanwhile, the palliative care segment printed $198 million for the quarter, supported by a 400 basis point year-over-year increase in net revenue per day, offset by a cost of $2.88 per day. The company also realized a 200 basis point pass-through of the palliative care price increase which has been in effect since October 1 FY21.” Moving down the P&L, the company saw ~125 basis points of headwind on the SG&A line thanks to acquisition costs related to Contessa and Home Health. Non-GAAP EBITDA increased 150 basis points year-on-year to $182 million ($5.60/share), while it printed GAAP EBITDA of $42 million ($1.31 /stock).
Additionally, AMED recognized an approximately 200 basis point rise in revenue per episode, helped in part by a similar increase in refunds. There was also a 6% increase in visit cost per visit, supported by higher cost inflation, labor shortages and an increase in salaried employment.
As shown in Appendix 2, quarterly operating performance has begun to slow significantly for the business since fiscal 2019. Despite a slight increase in sales and gross margin in fiscal 2020, this growth has stalled. and even backward. Despite this, the company remains FCF positive and is showing resilience in its earnings profile. It printed $55 million in FCF last quarter, a 5.7% year-over-year gain from $52.3 million. However, total debt also increased 146% year-over-year and approximately 3% sequentially to $442 million. The company also spent $17 million during the year on stock buybacks, and another $83 million under clearance.
Further evidence of this separation of fundamentals from top to bottom can be seen in the chart below. As can be seen, FCF margin (based on revenue) and gross profit margin started to bifurcate since mid-2020. Operating margin has followed suit since Q3 FY21′. As shown below, trends have continued to broaden and we believe this is a potential risk to earnings growth going forward. We also recommend that investors pay close attention to the evolution of AMED’s operating margins and FCF margins as a measure of earnings performance.
Additional forensic analyzes of the balance sheet reveal that the value of tangible equity has declined on a quarterly basis since FY2018. As shown in Appendix 4, the company’s asset structure has shifted towards an intangible bias /goodwill, with approximately 70% of the company’s asset base now comprised of intangible sources of value. This has direct implications for valuation and also as a measure of management’s effectiveness in its acquisition strategy. The company continues to expand the scope of its portfolio companies, however, questions arise about the fair value of these purchases given the total goodwill associated with each.
As shown in Appendix 5, taken from AMED’s Q2 FY22 10-Q Earnings Report, goodwill and intangible assets account for more than 130% of the book value of the company’s equity. This means that property, plant and equipment is only 0.89% of the book value. In addition, patient accounts receivable represent more than 77% of the Company’s current assets.
With a questionable lack of tangible value on offer, return on investment has also shrunk considerably. As seen below, we have looked at NOPAT’s share derived from the invested capital of the previous period. After some growth throughout the pandemic, NOPAT and ROIC have retreated and are now heading south.
Stocks trade at a discount to their peers across all major multiples used in this valuation. As noted, the company trades at approximately 4 times its book value, however, a large portion of its book value is made up of intangible assets and goodwill. AMED actually has a tangible book value of negative $410 million and therefore struggles to justify this discount. Additionally, the stock price is 17.6x the forward P/E, below the GICS industry peer median of 21.4x, suggesting the market is pricing a bottom line result to the sector. of the society.
Exhibit 7. Multiples and comps
At 17.6x our FY23 estimate of $5.80, we value the stock at $102, suggesting there is a lack of upside capture available in terms of valuation.
There are also many downside targets established by the daily analysis of the dot and number charts. Our studies reveal downside targets that have not yet been activated at $98, with potential upside at $181, an $83 gap between the two values that does not inspire much confidence in the estimate. the average valuation.
There’s a lot to like about AMED’s investment debate. However, the case begins to fall apart when looking for measures of tangible value when prescribing business value to the company and its actions. The balance sheet is heavily skewed towards non-tangible sources of value – i.e. goodwill – which arise from a series of acquisitions made by AMED.
Additionally, while FCF was $55 million for the quarter, it was down $11 million from Q2 FY21, and long-term debt also increased alongside a $17 million share buyback. Therefore, FCF and profitability look less attractive and on closer inspection, AMED has realized a decline in ROIC in recent periods. Valuations are also unfavorable. With the culmination of these factors in mind, we rate AMED neutral.