Huge Earnings Miss By AMED, Guides Low (ABMD) (AMED) (CPHD) (ISRG)

Home healthcare provider Amedisys (AMED) reported net income of $3.9 million or 9 cents per share in the first quarter of 2013, a considerable slide from net income of $8.6 million or earnings of 18 cents in the year-ago quarter. However, after adjusting for depreciation and amortization and legal fees, adjusted earnings per share declined 55.2% year over year to 13 cents in the reported quarter, missing the Zacks Consensus Estimate of 21 cents. Apart from the declining top line, margin contraction and higher share count led to the earnings downfall.

Quarter in Detail

Amedisys primarily derives revenues from its home health and hospice agencies. First-quarter net service revenue came in at $339.2 million, down 8.5% year over year. Revenues also trailed the Zacks Consensus Estimate of $362 million.

For the company’s Home Health division, Medicare revenues were $221.1 million and non-Medicare revenues were $51.2 million in the quarter. For the hospice division, Medicare revenues were $63 million and non-Medicare revenues were $3.9 million in the quarter. At the end of the quarter, the company operated 427 home health care centers and 97 hospice care centers.

The company reported a 50 basis points (bps) contraction in gross margin to 43.2% in the quarter. Expenses on salaries and benefits declined 4.9% to $82.8 million, while other expenses decreased 1.9% to $43.6 million. Amedisys posted operating margin contraction of 280 bps to $4.2 million in the quarter.

Amedisys exited the quarter with cash and cash equivalents of $7.0 million compared with $14.5 million at the end of 2012. Net cash provided by operating activities in the first quarter more than tripled to $32.4 million. The company’s long-term obligations (less current portion) were $43 million compared with $66.9 million at the end of 2012.

Guidance

Amedisys tweaked its guidance for 2013. Net service revenue is envisaged in the range of $1.28 $1.32 billion compared with $1.425 $1.45 billion earlier. The Zacks Consensus Estimate of $1.415 lies outside the revised guidance. The company forecasts earnings per share in the range of 45 to 55 cents compared with the prior outlook of 60 70 cents. The Zacks Consensus Estimates of 50 cents for 2013 is the midpoint of the outlook band.

Our Take

Amedisys posted another challenging quarter and missed the Zacks Consensus Estimate on both fronts. The revised guidance for 2013, which lies below our projections, also failed to inspire confidence.

We believe that the highly uncertain home nursing reimbursement environment, coupled with significant reduction in Medicare reimbursement in the recent past has affected Amedisys’ performance over the past few quarters. We expect the healthcare reimbursement pressure to persist even in 2013, thereby weakening the company’s performance.

Accordingly, we remain on the sidelines for Amedisys. The stock carries a Zacks Rank #3 (Hold). On the other hand, medical sector stocks worth considering are Intuitive Surgical Inc. (ISRG), Cepheid (CPHD) and Abiomed Inc. (ABMD). These stocks carry a Zacks Rank #2 (Buy).