Analyzing Amedisys (AMED) and Mulling Over More Methods

 

- Amedisys (AMED) provides home health care services, including infusion and respiratory therapy, mostly to Medicare patients as well as hospice services to the terminally ill.  According to the latest Value Line, AMED operates 325 Medicare certified home health agencies and 29 hospices in 30 states, mostly in the south.

 

- AMED’s 2008 annual report shows that the company rates a 54 out of 100 on Bob Adams’ spreadsheet with 6 red flags, 6 bullish results (good stuff), and 9 bearish results (not good stuff).  The red flags include that the cost of sales is up and increasing faster than sales, and that long-term debt to equity is twice the recommended level. 

 

** You can read about this free, super-duper spreadsheet, which needs just the ticker symbol to thoroughly analyze the latest A.R., and get it by going to my “Favorite Links” (click here).

 

- Better Investing’s First Cut page is where any BI member can upload their SSGs along with a two-page form that explains their judgments.  That’s where I got PatL’s SSG on AMED. 

 

** Pat has a unique method for doing his SSGs: after estimating future Sales and EPS growth, he next decides the Forecast Low Price and then uses that to estimate the Forecast Low and High PEs.  In contrast, my more conventional method is to decide the Forecast Low Price as my last judgment call.

 

- Here’ s a comparison of Pat’s SSG with mine and with Take Stock:

 

Amedisys (AMED)	Pat L (from BI’s First Cut)	Armin	Take Stock
Date	3-20-09	4-9-09	4-9-09
Data	Morningstar	S&P	Morningstar
Price	$32.71	$32.89	$32.89
52 week High & Low Price	$67.98 & $25.20	Same & $25.20	N/A & N/A
Project Growth From End of	Last Quarter	Last Quarter	Last Annual
Sales Growth	16.00%	11.00%	20.00%
EPS Growth	14.70% (from the PP)	11.00%	20.00%
High PE	16.0	15.0 (Alt-M)	17.1
High EPS	$6.48	$5.51	$8.02
High Price	$103.68 (9% > VL)	$82.70	$136.92 (44% > VL)
Value Line Estimated High Price = $60-95 as of 3-20-09
Low PE	8.2	7.3 (Alt-M)	6.5
Low EPS	$3.27	$3.27	$3.22
Low Price	$26.81 (Low PE x Low EPS)	$17.60 (70% x 52 week low)	$20.93 (Low PE x Low EPS)
Upside/Down	12.0	3.3	8.7 (imputed)
Total Return	26.0%	20.3%	33.0%
SSG Buy Under	n/a	$33.91	$49.95
RV & PRV (no outs)	N/A & 72.1	59.1 & 53.0	N/A
Quality	Not Rated	S&P = B	TS = 3.2 (unacceptable)
PTPM – 5 yr ave	13.1% Trend varying	13.1% Trend down	13.1% Trend N/A
ROE – 5 yr ave End Equity	13.9% Trend down	14.6% Trend up	N/A
ROE – 5 yr ave Start Equity	N/A	21.9% Trend down	22.0% Trend N/A
Debt to Equity – 5 yr ave	15.6% Trend varying	15.7% Trend up	N/A

 

 

Pat’s SSG:

 

- Pat estimated 16.00% future sales growth based on 20.00% for 2009 and 15.00% internal growth (no acquisitions) for the next 4 years.

 

** AMED’s historical sales growth has been much, much higher at 48% per year for the last 5 years and growing even higher for the last 3 and 2 years.

 

** Zacks.com is currently estimating a whopping 48.58% sales growth for the next 5 years (which seems unreliable); First Call via Yahoo Finance is at 23.40% for this year and 12.20% for next; and Morningstar made no estimate as its analysts don’t cover AMED.

 

** Estimated sales growth is important on the SSG when it is part of the Preferred Procedure which Pat used to estimate EPS for the next 5 years.

 

- Pat’s PP began with 16.00% estimated sales growth. Because of anticipated cuts to Medicare which pays for some 87% of AMED’s patients, he used 12.00% PTPM, down from 13.1% actual for the last 5 years.  Pat doesn’t mention what he used for an estimated Tax Rate and Shares Outstanding, but his final result was 14.7% estimated EPS.

 

- I don’t use the PP as I think it involves too many estimates and way too much guesswork.  See my recent critique: Pondering the Preferred Procedure, March 28, 2009.

 

- So far, this has been conventional SSG methodology.  Pat’s unique method began next with establishing the Forecast Low Price for the next 5 years at $26.81 which, he judged, was about 20% less than AMED’s current price; dividing that by his Low EPS of $3.37 gave him a Forecast Low PE of 8.2; and he doubled that to get a 16.0 Forecast High PE because he thought that AMED’s historical High PE was roughly twice its Low PE.

 

- Pat’s method resulted in a 12.0 Upside/Downside Ratio and, as a general rule, I’m always wary of U/Ds greater than 10.0 as reflecting overly optimistic judgments. 

 

** The BI/NAIC SSG Handbook warns against abnormally high U/Ds, without suggesting any red-flag number, but does say that large Upside/Downsides are most often due to a Forecast Low Price that is too close to the stock’s current price.  See: BI/NAIC Stock Selection Handbook, pages 111-112 (2003 edition).

 

-  My only concern with Pat’s method is the special importance it places on the Forecast Low Price which, given our recessionary market, is extraordinarily problematic to estimate for the next 5 years.  Other than that, I hope he studies it with many companies and different industries, and lets us know what he finds.

 

 

Armin’s SSG:

 

- When I did my SSG, the six analysts I always check were estimating long-term EPS at an average of 19.90% with Zacks.com high at 21.43% and Value Line low at 16.50%.  S&P and FactSet CallStreet via CNNMoney were at 20.00%, FirstCall via Yahoo Finance was 20.23%, and Reuters.com was 21.25%.

 

** The consensus estimate at Reuters was from 8 analysts who ranged from 33.0% high to 15.0% low.  At CNNMoney, the 9 analysts ranged from 25.0% high to 11.0% low.  The lowest of all estimates was 11.00% and that was the basis for my EPS estimate.

 

- To determine my Forecast High and Low PEs, I used the TK5 software’s Alt-M command which averages the 5 lowest High and Low PEs in the last 10 years and is usually the most conservative of the four options I am offered.

 

** I most often use Alt-M when, as here, I know little or nothing about the company.

 

- My $82.70 Forecast High Price was squarely within Value Line’s $60-95 estimated High Price and, as a result, was neither too high nor too low.

 

- I used $17.60 as my Forecast Low Price (70% of the 52 week low price) and decided not to rely on the conventional but higher $23.40 (Low PE x Low EPS) even though I used Alt-M to produce a conservative Low PE.

 

** Unfortunately, I know of no guidance that suggests 60%, 70%, 80%, or whatever percent to use when we are dissatisfied with the conventional choices for estimating the Low Price for the next 5 years.  The SSG Handbook is silent in this regard and my choice of 70% is just a guess.

 

** AMED’s stock price fell -29% in the last 3 months, -27% in the last 6, and -18% in the last 12 according to Google Finance.  In the table above, it was currently trading slightly above its 52 week low.  This long-running price decline makes it unusually difficult to estimate AMED’s Low Price and when it will end is just a guess.

 

Take Stock:

 

 - Take Stock is a computerized one click program at the Stock Central website that produces an almost-SSG (no U/D, no RV/PRV), involves no judgment by the user, and is designed to produce a conservative result.

 

-  Here, TS’s algorithms did not work well as it produced the most optimistic result.  Its Forecast High Price was a whopping 44% greater than the high end of Value Line’s estimate largely because its Sales and EPS estimates were so high at 20.00% (the maximum that TS allows based solely on the stock’s history).

 

Conclusions:

 

- Whether you use the PP or not, whether you use conventional or unique methods, no matter what you use or how you do a SSG, it’s always helpful to compare your judgments and your results to some guidelines to see if you are out-of-whack or in the ballpark.

 

- I use comparisons all the time to help me determine what’s reasonable and what’s not.  See: Determining What’s Reasonable and What’s Not, July 14, 2008.

 

Armin

 

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