2. Evan Sieg
Student Research
.
Important disclosures appear at the back of this report
Industry: Healthcare
Sector: Facilities Services
52 Week Price range
Average Daily Volume
Beta
P/E
Shares Outstanding
Market Capitalization
Institutioanl Holdings
Insider Holdings
Debt to Equity
31.86M
2.24B
72%
11%
0.79
Market Profile (as of 10/26/14)
$40.00-$54.48
398,321
1.14
22.33
Ticker: AMSG (NASDAQ) Recommendation: Buy
Price: $ 50.38 (as of 10/24/2014) Price Target: $63
Undervalued by: 24.8%
Earnings/Share Mar. Jun. Sep. Dec. Year P/E Ratio
2011 $0.38 $0.38 $0.43 $0.44 $1.64 18.07
2012 0.48 0.51 0.50 0.54 2.03 19.01
2013 0.57 0.59 0.53 0.62 2.32 15.62
2014E* 0.54 0.68 0.75 0.90 2.87 16.72
2015E 1.04 1.13 13.28
*Bolded/italicized figures are estimates
Highlights
Strong Acquisition Pipeline: AmSurg has great history of making positive acquisitions to increase their
top and bottom line growth. Recently they just finalized their largest acquisition yes of Sheridan
Healthcare, which is their first move to a diversified portfolio. Both of these companies will have ample
FCF in the following to quarters to continue their acquisition growth and expand their coverage.
Largest In a Highly Diversified Industry: AmSurg is the largest operator of ASC’s in the industry and
only maintains a 3% market share. Because of their potential for growth in this industry, and cost leading
advantage of their structure they are able to take advantage of this fragmented industry choosing new
centers in markets of interest to add to their portfolio. Historically they have grown their centers in
operation by 10% annually, there is expectations that should growth should continue independently of the
Sheridan deal and tis own acquisition targets and goals.
Growing Demand: AmSurg is positioned to capitalize on the aging population, and increasing number
of insured Americans under the Affordable Care Act. As the need for health services rise, AmSurg will
see a growth in their top line revenue, as well as in same center procedure growth.
SG&A Leverage and Margin Expansion: AmSurg has significantly higher profit margins when
compared to the industry. We expect to see continued margin expansion because AmSurg has put an
emphasis on lowering their SG&A leverage. Along with the synergies as a result of the Sheridan
integration.
Stock Valuation: Due to their national presence, strong margins, and potential opportunities for market
share penetration, I estimate that Amsurg stock has an expected return of 10.5%. Further, AmSurg is
undervalued by approximately 20% with a fair value of $62. The total return suggests that it is an
attractive buy.
Source: Yahoo! Finance
Date: 10/29/2014
Source: Yahoo! Finance
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Exhibit 1: The Company
Exhibit 3: Industry Revenue (in millions)
Source: U.S. Census Bureau
Exhibit 2: Revenue Breakdown After
Sheridan Integration
Source: Investor Presentation
Business Description
Company: AmSurg Corp. (NASDAQ: AMSG) acquires, develops and operates ambulatory surgery centers
in partnership with physicians. Headquartered in Nashville, Tennessee, AmSurg operated 242 centers at
December 31, 2013. By focusing on the delivery of high quality, low cost surgery services that create high
patient and physician satisfaction, AmSurg Corp. creates value for the three constituencies involved in every
surgical procedure: the patient, the physician and the payer. Despite the fact that AmSurg is the market
leader, its market share remains relatively low. This suggests that the Healthcare Facilities Industry is
significantly fragmented, posing substantial room to grow. Historically, AmSurg’s revenue breakdown has
consisted purely of revenue from their ambulatory care centers, since the acquisition of Sheridan Health
though they now have fragmented revenue breakdown
Sheridan Health Care: It is important to bring to light the business that Sheridan healthcare is operating, as
it will be referenced in short throughout the following analysis. Sheridan is one of the leading providers of
healthcare solutions for anesthesiology and other specialties to physicians, hospitals and outpatient centers.
Physician led and managed, Sheridan provides comprehensive hospital-based clinical and management
solutions for anesthesia outsourcing and other specialty areas including emergency medicine, children's
services and radiology. These services will pair with AmSurg’s existing ASC network, and health service
joint ventures to capitalize on the best in class services that each company now offers.
Growth Strategy: AmSurg’s strategies for growth:
Acquisition Growth: AmSurg historically has focused on adding centers to its portfolio. On average
year over year this has been 7 centers, with an addition to revenue of 7% annually. This summer AmSurg
made its largest acquisition to date purchasing Sheridan healthcare for $2.35 Billion. This acquisition is
expected to be 15% accretive to earnings in the following years, and also is the first move to a diversified
field of operation away from ambulatory service centers.
New Contract Growth: AmSurg has been working to strengthen their new contract growth number for
the past two quarters, raising their sales team numbers by over 100%. This along with the new Sheridan
line of business should allow for a higher than previously experienced new contract growth rate.
SG&A Expense Cutting: To increase bottom line growth through improvements to efficiency, AmSurg
has focused on reducing compensation, overhead expenses, and sales costs. Further, the company seeks
to optimize its ASC portfolio to fall in line with industry demand. This has translated into a lowering of
SG&A margin to below the targeted level of 33%.
Retention and Same Contract Growth: Amsurg is estimating a growth in same contracts under the
AmSurg brand in the following two quarters, this along with their 94% customer retention allots for their
stable growth profile. Pulling Sheridan’s new product mix in, as well as its existing relationships with
hospitals there is potential for growth in those retained relationships through cross promotion.
Competitors: AmSurg currently does not a have prime comparable other than the industry/sector indexes.
Because of its size and geographical coverage there historically has not been a true pure play comparable.
With the Sheridan line of business as well, it will be increasingly difficult to find a comparable competitor,
and because of such we will reference the benchmarks regularly for comparables.
Industry and Peer Group Overview
In the Healthcare Facilities Industry, companies provide care and services to patients in varying areas of
medicine. This is a significantly fragmented industry comprised of more than 600,000 centers nationwide
in the ambulatory service center designation. The majorities of centers are privately held by physicians
and operate on a small scale model. There is also competition for procedures from the traditional
hospital setting.
The Health Care spending in the U.S. rose 3.7% in 2012 to 2.8 Trillion, just under nine thousand dollars a
person. This trend is expected to maintain throughout the following decade with an average rate of 5.7%.
The affordable care act and an aging population are expected to drive faster projected growth in health
spending in the following years. The year is expected to close with 5.6% growth over 2013, as more
Americans have access to healthcare and economic conditions continue to improve.
Headquarters
Year Founded
No.of Employees
No. of Centers
1992
4,100
239
Nashville, Tennessee
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Exhibit 6: Procedures Performed Growth
AmSurg vs. Industry
Source: Company 10-Q, and Bloomberg
Source: Company Annual Report, AHA ChartBook
Exhibit 5: ASC Center Growth
Exhibit 4: Percentage of Uninsured
Americans, Outpatient Visits
Source: Gallup Polls, AHA ChartBook
Health Care Reform: In the U.S. Market there has been an upheaval in the current healthcare market place.
Through the implementation of the Affordable Care Act under President Barack Obama. The Intention of
this new healthcare initiative is to bring access to affordable healthcare to all Americans. The legislation in
its full form requires that all Americans have health insurance coverage either through their employer, a
public program such as Medicaid or Medicare, or by purchasing coverage from a state-based health insurance
exchange. As well as requiring that all Americans carry health insurance, it prevents Health Insurance
agencies from denying coverage to those with pre-existing conditions, dropping coverage of people that
become sick, or charging premiums to those with certain illnesses. This is important to note that these new
regulations on health plans have large implications on their bottom line as they will have to cover those that
have a higher health care coverage cost. There has been debate on how carriers will handle this new cost
through either distributing it across their entire book of insurers, or begin new policies on treatment practices
and payment. The bill also requires that large employers with over 50 employees you are required to offer an
affordable care plan that is partially sponsored through the company beginning in 2015. This is anticipated to
drop the number of uninsured Americans below 15% in the year 2015. The law carries out further plans in
2016 as well with target number of uninsured in the single digits, this is anticipated to drive demand for
healthcare to all-time highs, we have already seen the effects in the percentage of GDP that is accounted for
in healthcare spending rising from 16% to a projected 18.5% in 2016.
Result: The effect of the higher number of insured on the health services will be an increase in demand from
a raise in health care demanders. Along with impact on insurers margins from the new restrictions should
drive more patients to lower cost providers such as outpatient, and ambulatory service centers.
Growing Industry Demand
Specific to the Ambulatory Service Center industry there has been an upswing in demand, as the market
demands lower cost alternatives. This is becoming a larger driver as the Affordable Care Act puts pressure
on insurers and lowers their margins by requiring them to accept non-favorable clientele. The number of
uninsured is expected to drop by fifty percent in the coming years, which will put an immense pull on the
health care servicing industry to treat these new customers.
Competitive Positioning
National Presence
In the past, the Health Facilities industry has been highly fragmented, and still is in many cases. AmSurg is
capitalizing on this fragmentation with their strong national presence that has expanded with the purchase
Sheridan Healthcare. Their strong presence allows them to lower overhead cost at the individual center level,
by pushing certain tasks to the corporate level, leveraging their size in their favor. This has also allowed
them to make favorable moves in joint venture opportunities with other health service providers to better
diversify their contract customers.
Clarity to Increase Top Line Growth: With the growing pressure on insurance companies, clarity in pricing
is becoming a growing concern. It is predicted that within the next two years private health coverage
organizations will begin to dictate which facilities their insured may go to for certain procedures. Medicare
and Medicaid are not legally allowed to direct their patients to certain centers. When insurance companies do
make the decision to change policy to promote one facility over another AmSurg should be a preferred
choice. Because of AmSurg’s cost efficiency they are properly positioned for when insurers are forced to
allocate their insureds to certain providers. Management is confident that their structure is more than ready
for this transition to a buyers’ market of health services.
Shared Costs to Boost Profitability: As AmSurg and Sheridan finalize their integration they will be able to
share in each other’s overhead expenses, lowering the overall margin spent on accounting, marketing, etc.
This vertical integration will in most part be in the anesthesiology department of their centers. The benefit of
moving the anesthesia in house is it lowers the cost over all and ensures that they will be able to supply all the
centers that need anesthesia services. The combination of the shared overhead, vertical integration, and the
possibilities for cross promoting across business lines gives them an opportunity to increase revenue at a
lower cost. Boosting the profitability of the company as a whole.
Procedure Growth: Year over year AmSurg has been able to service more patients, increasing the
efficiency of their centers to handle on average 2% more procedures a year along with acquiring new
facilities. AmSurg has year over year been increasing the number of procedures they perform, while the
market has in fact been performing less surgeries as a whole. Exhibit 5 depicts the growing spread in
procedure growth AmSurg has over its industry. This level of operational efficiency is pertinent in maintain
the margins that AmSurg has been maintaining since the recession. Sheridan also has potential for growing
Estimates
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Exhibit 8: Average Revenue Contribution
Per Procedure
Source: Company Annual Report & 10Ks
Exhibit 7: Health Care Spending
GDP
Source: CMS
the number of procedures the current ASC’s can handle yearly with their expertise in health service
management.
Same Store Sales
Organic Growth: Organic growth is an important metric because of its importance if the opportunity for
acquisitions ceases to exist. This highly unlikely scenario because of the highly fragmented industry that
AmSurg functions in, would allow AmSurg to continue to receive its organic growth rate of 4-6%. This
comes from a combination of current contracts expanding, and new contracts the company receives
across the year.
Outlook: The industry sales are positively affected by GDP growth and number of insured, I am
generally positive about the overall outlook of the industry for the next few years due to healthier
economic forecasts, which outweigh the uncertainty of healthcare legislation changes.
Market Share
Fragmented Industry: AmSurg’s mainline of business is the ambulatory service industry which is
outpatient care centers for different specialties. This industry is extremely fragmented at the national level,
AmSurg has the highest market share of approximately 3%. This is a positive attribute for AmSurg because
of their growth through acquisition as long as the market remains highly fragmented they are able to choose
targets in areas that attract them with relative ease.
Expansion through Economic Recovery: Since the recession we have as nation seen an increase in health
care spending, in the amount of 5% average YOY. This increased spending has allowed AmSurg to
continually reinvest in to their business and profit from maintaining new centers. As this trend continues we
can expect to more top line growth as more Americans are having preemptive screenings done.
Geographical Growth: AmSurg has its strongest market share in states such as Florida, Texas, and
California. Outside of these three states, there is substantial growth to be seen in rising markets, where
market share is lower. As AmSurg first moves Sheridan Health Care into its current markets, and then makes
the transition to operating more ASCs in Sheridan dominated markets, there is great potential for
geographical growth. AmSurg covers fourteen more states then Sheridan Health Care as of Q2, and these are
all grand opportunities’ to move Sheridan into new markets, and rive new contract growth through new
market exploration.
Investment Summary
Branding Strategy: In an effort to enhance brand recognition and loyalty, AmSurg has moved to a national
brand strategy. Previously, the ambulatory care service market has been highly fragmented with many
centers being owned by the physicians who run them. The AmSurg brand has promoted the outpatient care
industry. Promoting universal brand recognition puts AmSurg at the forefront of customers’ minds and
ensures a consistent branding identity. As a result, the company will see positive growth through repeat and
referral patients. This is especially prudent with the increasing amount of transparency the healthcare
industry is being forced under. The branded house strategy also allows AmSurg to reduce its marketing and
advertising costs because it does not require individual ads for each of its local centers. The name is
recognized by health professionals; along with the acquisition of the Sheridan Company as well these two
brands make for a potent combination in the patient and health-service servicing market.
Acquisition Pipeline: AmSurg has a strong history of increasing revenue, and in turn earnings through the
acquisition of ASC’s and other smaller firms operating in their sector. This has accounted for a historical 7%
growth in revenue. This practice has brought AmSurg to be the largest operator of ASC’s in the country and
allowed them to maintain their strong growth year over year. The acquisition of Sheridan Healthcare was the
first step away from the ambulatory service center, differentiating their revenue to include physician
placement. This wider scope of services will allow for growth in both previously independent companies
through synergy potential in their offerings. In the year to come, 2015, each company is recognized to
continue their investment into acquisitions in the total of $200 million, reinforcing their acquisition growth
predictions.
Seeing More Patients with Higher Margins: Benefitting from the national recognition in exceptional care,
AmSurg is able to generate favorable brand recognition. This gives them the ability to pull in more referrals,
and see more patients. In previous years, AmSurg has been able to maintain a 21% higher NI margin than the
industry. During this time, they have also been able to increase the quantity of quantity of patients treated by
2% over last year. This is evidence of their superior branding power resulting from the national structure.
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Source: Company 10-Qs
Exhibit 9: Gross Margins
Industry Growth and Demand: The Health Care Industry is poised for growth in the future. With the roll
out of the affordable care act, health care coverage is now available to millions more Americans. Since the
recession, the industry has experienced positive growth with an improving economy contributing to its
growth. The Industry also profits from demand which can now be realized because of the larger number of
insured Americans. As consumer spending on healthcare continues to increase year over year, 9% since
2011, the drive for more affordable care will rise. Ambulatory Service Centers are best poised to capitalize
on this industry growth, because of their availability to provide better service at a lower cost because of their
structure. With these assumptions we can expect the increase of revenue seen in AmSurg’s topline to
maintain at a minimum their 6% organic growth.
Geographical Market Share Growth: Health Care Industry and more specifically ambulatory care centers
are characterized by significant fragmentation. While AmSurg is the largest operator of freestanding centers,
it has a market share of 3.6%, mainly concentrated in Florida, Texas, New Jersey, Maryland, and California.
. AmSurg’s Strong branding strategy will allow them to penetrate the untapped markets. In particular, the
acquisition of Sheridan Healthcare moves them into 4 more states, as well as increasing their current standing
in their current markets. As well as the potential to move Sheridan into 13 new markets that it currently is
not operating in.
Attractive Valuation Indicates a BUY: The various valuations we performed reveal a consensus that
AmSurg stock is undervalued. Our fair value estimate is around $62, which suggests an undervaluation of the
current stock price by 22%. Furthermore, AmSurg currently enjoys being the largest operator of ambulatory
care centers in the industry. The easiest way for individuals to invest in this business model is to buy
AmSurg stock.
Financial Analysis
Revenue Growth
Since 2010, AmSurg’s revenue has shown to outpace industry growth, with an average of 12.9% per year
versus the 6.6% of the Health Care Facilities industry. The company’s growth is a result of 6% organic
growth and 6.9% acquired growth. Looking forward, I broke the company’s future revenue growth
estimates into three categories: (1) economic/industry growth, (2) demand growth, and acquisition
growth.
Acquisitions Contributing to Top Line Growth: AmSurg historically adds 6-10 new centers every year.
These centers for the most part are previously run by either independent physicians or physician co-ops.
AmSurg is able to purchase these centers from the physicians and bring it under their governance, and lower
cost. Often times leaving the original physician in place, which has contributed to their industry leading
retention ratio of doctors at 93%(3). With each new acquisition AmSurg recognizes a growth in revenue. It
is through this high level of effective acquisition that has put AmSurg at the top of its industry, and given it
one of if not the strongest pipeline for acquisitions. AmSurg has a background of making large gains
through acquisition, and the latest deal made on Sheridan has been one more to add to the list. The
Sheridan business nearly doubles their expected revenue in 2015. Both organizations expect to
continue their spending on acquisitions in the quarters to come as well. AmSurg historically has
realized a 7% top line growth from acquisitions year over year, and it can be expected that Sheridan
will continue with similar results under AmSurg management. The expected spending on acquisitions
for the following quarters is $50 million, to paid from FCF.
Sheridan Acquisiton Contributing to Revenue Expansion: Management is expecting to achieve synergies
in the first twelve months with Sheridan on books in excess of $30 million, with $10 million in in cost and
operational synergies as well. The new revenue areas to AmSurg that come from Sheridan Healthcare will
also promote growth in their operating margin. The biggest factor of margin growth as a result of this
acquisition is the possibilities for vertical integration of certain specialist that AmSurg centers previously had
to go out of house for. As well as across both business units integration of certain operations such as sales,
accounting, and financing reducing the total combined overhead of the two companies.
Economic/Industry Effects: The health care facilities industry historically shows a two month lag in relation
to GDP with expected GDP to rise we can expect to see an increase in health care facilities revenue. Also the
impact of the affordable care act should be favorable, as the industry sees more people insured, this should
result in more patients seeking care. The fact that many carriers are now having to control cost as much as
possible has also led to the thought of carriers making requirements that their patients use more affordable
options that do not sacrifice care, such as ambulatory care of hospitals. Amsurg in the last quarter alone
recognized a 1% increase in same center revenue.
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Exhibit 10: Operating Margins
Exhibit 11: Earnings Surprise
Source: Company 10-Qs
Source: Company 10-Qs
Demand Growth: As the baby boomer population ages the need for certain services rises
appropriately. With gastrointestinal, and optometry being two areas of high potential for growth as
insurance carriers begin to require prescreening in these two areas for preventative care. Baby Boomers
represent approximately 76 million Americans in the population today, as this population continues to
age their need for medical care rises, increasing the demand for centers that can cater to the needs and
wants of this generation. This growing population of elderly citizens, along with growing number of
insured Americans as whole is anticipated to have an impact on demand that could drive it above
current capacity. AmSurg is designed in such a way that they will be able to capitalize on this demand
for health care needs. Through this large generations aging, the rise in insured participants in the
marketplace, and the rising need for insurers to lower their cost ambulatory care centers are expected to
outpace the healthcare sectors growth in the long-term.
In summary, AmSurg can expect to receive at a minimum a 13% revenue growth as a result of their
market positon, and acquisition targets. .
Profitability
AmSurg has been a leader in market efficiency since inception. Their average annual net income
margin grosses 20% nearly seven times the industry average. As AmSurg continues to grow their
revenue stream their above industry average profitability makes them very desirable from an investor’s
viewpoint.
Gross Margin: AmSurg has seen a decrease in their gross margin since 2009 of 2%, but with a gross
margin of 85% they have room. The industry average is 29%, AmSurg is outperforming the industry by
55 points. This highlights AmSurg’s premier cost efficiency. Expectations with the Sheridan
acquisition are that there should be moderate gross margin expansion in the quarters to come. Through
cost synergies between the two companies, the next two quarters though will not show this expansion
because of the delay in operational efficiency.
Net Income Margin: AmSurg has a market leading Net Income margin. While the industry experiences
single digit profit margin. AmSurg nets over 20%, this is a result of their low cost structure, and
efficiency. They have promoted this growth by bringing Sheridan Health into their corporation, by
leveraging Sheridan’s business with their own they expect a 15% accretive gain to earnings. In the
following quarters my expectations are that the net income margin will dip following the huge purchase
of Sheridan Healthcare, incurring the interest expense, and the adjustments to operations. This short-
term dip will be offset by the long-term potential the two organizations share together.
Falling SG&A Leverage: In an effort to improve profit margin and promote growth, AmSurg
management has lowered and maintained its SG&A leverage at below 30%. This is a primary focus for
Amsurg, by keeping cost low they are able to better capitalize on the set payouts of certain payer groups.
With 24% of their payer break-down being Government payers, it is essential to be able to minimize cost
to benefit from the high traffic in this area. The acquisition of Sheridan Healthcare will further there goals
to cost minimization in their operating ASC’s by vertically integrating their anesthesiologists which were
previously outsourced to other companies. Management is predicting a cost synergy of $ 10 million in
2015.
Return on Equity: AmSurg is currently trailing the industry with a 10% ROE where the industry has
11%. AmSurg has been closing spread since 2010 when it had an unimpressive ROE of 8.5%. As
AmSurg continues to capitalize on their industry leading margins, and growth we should see this
improve.
Sheridan Effects on Margins: Management is expecting to achieve synergies in the first twelve months with
Sheridan on books in excess of $30 million, with $10 million in in cost and operational synergies as well.
The new revenue areas to AmSurg that come from Sheridan Healthcare will also promote growth in their
operating margin. The biggest factor of margin growth as a result of this acquisition is the possibilities for
vertical integration of certain specialist that AmSurg centers previously had to go out of house for. As well
as across both business units integration of certain operations such as sales, accounting, and financing
reducing the total combined overhead of the two companies.
Earnings
AmSurg has developed a reputation for regularly beating earnings. Through its acquisitions and organic
growth, AmSurg has been able to maintain stable earnings growth year over year coming out of the
Recession. Since 2011, EPS has been growing year over year an average of 14%. Looking forward, I am
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Exhibit 12: Sales per SG&A Dollar
Source: Company 10-Qs, Reuters
optimistic in terms of earnings growth due to strong expected growth in the industry and the company’s top
line, as well as a reduction in general operating expenses.
Pro Forma: Based on the assumptions that (1) the company revenue will grow between 11-14% in 2014, (2)
the gross margin will be between 85-86%, (3) the SG&A leverage will remain in the low 30%, we estimate
the Q4 2014 Q3 EPS to be $0.75, beating earnings estimates of $0.66. For the fiscal year 2014, EPS is
expected to be $2.80, a 17% increase from 2013. Keeping with this upward trend, earnings are expected to
grow by an average of 21.33% per quarter through to second quarter of 2015. Following previous sections,
for 2014, we attribute 13.75% of EPS growth to revenue growth and 7.58% to margin expansion.
Efficiency
Sales per SG&A: AmSurg’s revenue growth is outpacing its SG&A, as demonstrated by its rising sales per
SG&A dollar. Historically AmSurg has been able to produce three times the revenue for every dollar spent
on SG&A over their industry, and nearly fifty percent more than their closest comparable with HCA
holdings. In recent years in fact AmSurg’s supreme efficiency model has allowed them to stretch the margin
between their SG&A per dollar of sales away from HCA. This has accounted for bottom line growth as they
roll their operational platform out across new markets and acquisitions. By maintaining its lower SG&A
costs relative to its competitors, AmSurg is able to use its higher efficiency to grow its bottom line.
Sheridan Integration: The integration of Sheridan Healthcare’s top in class products into AmSurg’s current
market place allows them to cross market more efficiently than their competitors. Sheridan’s largest revenue
contributor is their anesthesia branch, which is the biggest highlight in the integration of the two companies,
as anesthesia outsourcing is one of the highest costs at AmSurg’s center now. By vertically integrating they
will be able to drive these costs down, raising the margin on procedures. As well as merging the two firms
sales teams, allowing them to promote both businesses simultaneously as AmSurg poises for the move into
servicing the Health Service industry (Hospitals).
Cash Flow
Total Net Cash Flow: Due to the high growth in revenue, AmSurg has experienced cash from operating
activities growth in double digits year over year since the recession. They also have strong depreciation
growth as the amortize more centers and acquisitions. In 2013 they used this excess cash to buy back $11.5
Million in stock. And pay down nearly forty million in outstanding debt. These show that the company is
positioning itself to provide more value to the shareholders.
Free Cash Flow: AmSurg had free cash flow in 2013 of $304 Million. They recognized $333 million in
operating cash flow, with $29 million spent on capital expenditure. The expected free cash flow for the
2014 fiscal year is expected to rise above last year’s reporting with an increase from Sheridan’s cash
flows. A more relevant measure of cash flow is free cash flow, which is operating cash flow after capital
expenditures. Since 2009, AmSurg has generated an average free cash flow exceeding $210 million. This
Free cash flow is what is for the most part used to purchase new centers, and in the coming quarters we
should expect to see the same amount of FCF spent on acquisitions as historically can be seen. In Q3 we are
expecting a surge in free cash flow from the Sheridan line of the business. As Well as long term benefits to
free cash flow as result of the integration of Sheridan. Looking forward, I expect free cash flow to continue
to increase at an annual rate around 15-18%. Thus, free cash flow will be in the $400 million range in 2014
and $550 million in 2015.
Q2 Q1 Q4 Q3 Jun-2014 Mar-2014
Revenue 1672.4 1311.7 1028.7 576.3 281.1 263.1
Other Revenue, Total 230.5 -- --
Total Revenue 1673.6 1442.9 1183.0 806.9 281.1 263.1
Cost of Revenue, Total 224.0 193.1 158.3 108.0 41.3 38.7
Gross Profit 1449.6 1249.7 1024.7 698.9 239.8 224.4
Selling/General/Admin. Expenses, Total 412.1 404.1 316.9 177.5 84.9 83.2
Depreciation/Amortization 54.9 43.1 38.8 23.9 8.6 8.4
Other Operating Expense 404.7 272.6 208.8 114.8 60.3 55.3
Total Operating Expense 871.8 719.7 564.5 316.2 193.1 182.7
Operating Income 577.8 530.0 460.2 382.6 88.0 80.4
Interest Expense, Net Non-Operating -6.9 -6.9 -6.9 -6.9 (6.9) (7.0)
Other, Net -- --
Net Income Before Taxes 570.94 523.12 453.34 375.73 81.1 73.4
Provision for Income Taxes 49.59 45.44 39.37 32.63 12.9 13.1
Net Income After Taxes 521.35 477.69 413.97 343.10 68.2 60.3
Eps 1.13$ 1.04$ 0.90$ 0.75$ 0.68$ 0.54$
20142015
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Free Cash Flow/EBITDA Conversion Margin: In an effort to measure earnings quality and liquidity, we
examined the free cash flow/EBITDA conversion margin. A high ratio would suggest that more cash flow or
liquidity flows through the same dollar earnings, and, thus, the quality of earnings is better. AmSurg has
maintained their high quality of earnings since the recession turning over 30% of their EBITDA to FCF
annually.
Debt
The majority of AmSurg’s debt profile is comprised of loans. Their debt to equity ratio at the end of the
2013 fiscal year was .79, this is .24 above the industry median. This increased leverage is a result of
their predominant acquisition culture. With their high debt ratio though, they still maintain an interest
coverage ratio above 11
Debt to Equity: Currently, AmSurg has $2.6 billion in bonds outstanding, and $3.2 billion in long-term debt
outstanding. Compared with the Peer Group, AmSurg carries a significantly higher amount of long-term
debt. In 2013, AmSurg’s debt to equity ratio was 1.5x their Peer Group. Normally, this difference in debt
levels would be of concern. However, this is a natural result of their business model focusing on long-term
expansion through acquisitions. The Sheridan being a driver of their debt expansion, with $2.1 billion loan
being taken out in the summer of 2014 to cover the cost of the acquisition and buy back a piece of the equity
offering to lower Hellman & Friedmans stake in AmSurg below 10%, when it was originally proposed to be
upwards of 25%. Along with taking over the debt that Sheridan Currently has outstanding.
Debt to EBITDA: More importantly, it is informative to look at AmSurg’s debt-to-EBITDA ratio because it
shows the amount of time it will take the company to pay off its debt. Amsurg’s current debt to EBITDA is
1.54, compared to the industry’s 1.61. The debt to EBITDA suggests that the company is more capable of
paying its debts compared to their peers. This is beneficial when evaluating the company’s credit worthiness,
the fact that AmSurg even with their high debt to equity ratio has the earnings to cover their debt better than
their peers is what sets them apart.
Solvency: Amsurg’s first bond to mature will be in 2017 with a value of $176 million. Based on free cash
flow estimates, AmSurg should be able to cover this bond with an excess of $200 million. This exemplifies
the strong positioning of AmSurg’s capital structure. With the Free Cash Flow growth expected from
AmSurg in the coming years, there are no expectations that they will not be able to cover their debts.
Valuations
In this section, we estimate the fair values of AmSurg’s stock. It should be noted that all input data were
derived from historical company data and pro forma estimates (Exhibit 35).
Holts Model: .The Holt’s model a relative P/E model was used to determine AmSurg’s value relative to its
industry, and the companies leading competitor. This is a relevant model as AmSurg operates in an
industry with little differentiation between service providers other than operating efficiency. Using this
model I compared AmSurg to the Health Care Facilities industry, and HCA Holdings. The industry has a
P/E of 19.7 and a street estimated growth of 11% along with a dividend yield of 1.5%. When compared
directly to the industry AmSurg yields a fair price of $67.21. When Compared to HCA Holdings which has
a P/E of 18.5, growth estimate of 12%, and pays no dividend; Amsurg is valued at $63.37. The culmination
of these values suggests that AmSurg is currently undervalued in excess of 22%
Franchise Value Model: The franchise value model is used to evaluate the return associated with a future
expansion of the firm. For this calculation we assumed that the return of the new business would exceed
the required rate of return of the firm. This is an applicable model as AmSurg often purchases centers to
add to their portfolio and implements their current business model at a lower cost. With a return of 19%
on new business, and a growth rate of 16%, an adjusted k of 17.31%, and BPS of $32. This model
yielded a fair price of $62.02, implying an underpricing of 23%
Residual Income Model: The residual income model values a firm using current book value per share and
the present value of expected future residual income. This model is relevant for evaluating AmSurg because
of the Using a more pessimistic prediction for future growth of 13%, a required rate of return of 15.74%,
ROE 18%. The fair price is $61.08, which suggests an undervaluing of 22%.
Average Fair Value: The summary estimates a fair value of $62, undervalued by 24%, which is derived from
the combined simulation results. This information represents a strong positon to BUY AmSurg.
Investment Risk
10. 10/30/14
CFA Society of Orlando
Stetson University Student Research
9
Risk that Payers Rates do Not Increase: There is always the potential that third party payers such as health
insurers or government agencies do not raise their payment rates enough to cover the expansion in cost. This
could lower the margins that AmSurg experiences on their income statement. This year though we saw a
remarkable increase from Medicaid rates north of 7% in some of the most predominant services Amsurg
maintains including GI and Optometry. These rate increases alone are expected to yield an increase in
revenue by 2% for AmSurg. There is little AmSurg can do to hedge for this risk as the majority of health
care insurers have set rates they pay for procedures. Through their high cost efficiency design though
AmSurg is best prepared for this rate stagnation as compared to their industry.
Cost of Acquisitions Rise Unfavorably: AmSurg’s growth is dependent on the availability to make
acquisitions of new centers, which are favorable in their strategic vison. If the marketplace becomes to
competitive they could see the cost of these centers rise to unacceptable levels, lowering their availability of
growth to be purchased. With the ASC market as it currently stands being so highly fragments, with AmSurg
being the largest market share holder with only 3%, it would take a major turn in events for this to be of
serious concern to AmSurg. At its current design the availability of centers to be acquired is monumental
with the physician co-ops becoming one of their favorite acquisition targets.
Legislation Changes: The Healthcare services industry has been a hot debate topic in the political
atmosphere as of late, and with that comes uncertainty. If lawmakers where to change the healthcare
industry to a fully governmentally ran, or change the laws that apply to AmSurg’s market, the effects could
be profound. With the passing of the Affordable Care Act the largest health care reform in years, we have
seen the public’s distrust in government interference. Because of this the only change that currently is
measurable risk are the reforms directing government paid health plans, but as mentioned above this has been
favorable as of recent developments, and with Sheridan’s contracts now servings AmSurg we see the
percentage of revenue from government payers drop from 25% to 20%.
11. 10
Table of Contents
Appendix 1A: Income Statement and Pro Forma 10
Appendix 1B: Balance Sheet 11
Appendix 1C: Statement of Cash Flow 12
Appendix 2: CAPM 13
Appendix 3:Franchise Value Model 14
Appendix 4:Residual Income Model 15
Appendix 5: Holt’s Model 16
12. Important disclosures appear at the back of this report
Appendix 1A: Historic and Pro Forma Income Statements
Source: Estimates
.
1. The percentage of cost of sales for each product is determined by the SAAR of four quarters ago.
2. The Q3 results of 1014 is the first quarter to reflect the Sheirdan Health Care acquistion
Q2 Q1 Q4 Q3 Jun-2014 Mar-2014
Period End Date 30-Jun-2014 31-Mar-2014
Revenue 1672.4 1311.7 1028.7 576.3 281.1 263.1
Other Revenue, Total 230.5 -- --
Total Revenue 1673.6 1442.9 1183.0 806.9 281.1 263.1
Cost of Revenue, Total 224.0 193.1 158.3 108.0 41.3 38.7
Gross Profit 1449.6 1249.7 1024.7 698.9 239.8 224.4
Selling/General/Admin. Expenses, Total 412.1 404.1 316.9 177.5 84.9 83.2
Depreciation/Amortization 54.9 43.1 38.8 23.9 8.6 8.4
Other Operating Expense 404.7 272.6 208.8 114.8 60.3 55.3
Total Operating Expense 871.8 719.7 564.5 316.2 193.1 182.7
Operating Income 577.8 530.0 460.2 382.6 88.0 80.4
Interest Expense, Net Non-Operating -6.9 -6.9 -6.9 -6.9 (6.9) (7.0)
3.309079663 4.057804488 3.246243591 3.246243591 3.246243591 3.31095406 3.16225962
Other, Net -- --
Net Income Before Taxes 570.94 523.12 453.34 375.73 81.1 73.4
Provision for Income Taxes 49.59 45.44 39.37 32.63 12.9 13.1
Net Income After Taxes 521.35 477.69 413.97 343.10 68.2 60.3
Eps 1.13$ 1.04$ 0.90$ 0.75$ 0.68$ 0.54$
20142015
13. 12
Appendix 1B: Historic Balance Sheets
Jun-2014 Mar-2014 Dec-2013 Sep-2013 Jun-2013 Mar-2013 Dec-2012 Sep-2012
Period End Date 30-Jun-2014 31-Mar-2014 31-Dec-2013 30-Sep-2013 30-Jun-2013 31-Mar-2013 31-Dec-2012 30-Sep-2012
Assets ($ Millions)
Cash and Short Term Investments 44.9 47.1 64.2 45.5 39.9 42.4 55.2 35.7
Cash & Equivalents 44.9 47.1 50.8 45.5 39.9 42.4 46.4 35.7
Short Term Investments -- -- 13.3 -- -- -- 8.8 --
Accounts Receivable - Trade, Net 110.5 106.2 105.1 104.3 105.3 101.5 96.8 88.7
Accounts Receivable - Trade, Gross 141.0 135.3 132.9 130.8 130.9 125.8 119.1 112.1
Provision for Doubtful Accounts (30.4) (29.1) (27.9) (26.5) (25.6) (24.3) (22.4) (23.4)
Total Receivables, Net 110.5 106.2 111.2 104.3 105.3 101.5 102.7 88.7
Receivables - Other -- -- 6.1 -- -- -- 5.9 --
Total Inventory 18.8 18.4 18.4 18.9 18.3 18.1 18.4 14.8
Prepaid Expenses 34.7 37.2 12.7 29.3 29.3 30.1 11.4 22.1
Other Current Assets, Total 3.4 1.0 4.5 4.4 3.8 1.0 4.5 3.0
Deferred Income Tax - Current Asset 3.4 1.0 3.1 4.4 3.8 1.0 3.1 3.0
Other Current Assets -- -- 1.4 -- -- -- 1.4 --
Total Current Assets 212.3 209.9 211.0 202.4 196.6 193.1 192.2 164.3
Property/Plant/Equipment, Total - Gross -- -- 392.3 -- -- -- 362.1 --
Buildings - Gross -- -- 161.8 -- -- -- 151.3 --
Machinery/Equipment - Gross -- -- 228.2 -- -- -- 208.5 --
Construction in Progress - Gross -- -- 2.3 -- -- -- 2.3 --
Property/Plant/Equipment, Total - Net 168.8 169.0 169.9 168.0 163.4 163.2 166.6 144.6
Accumulated Depreciation, Total -- -- (222.4) -- -- -- (195.5) --
Goodwill, Net 1,794.5 1,764.6 1,759.0 1,738.0 1,675.2 1,647.2 1,652.0 1,250.5
Intangibles, Net 11.0 10.7 10.8 10.9 10.9 11.0 11.0 16.1
Intangibles - Gross 3.4 3.4 3.4 3.4 3.4 3.4 3.4 11.7
Accumulated Intangible Amortization (2.6) (2.5) (2.5) (2.4) (2.4) (2.3) (2.3) (4.9)
Long Term Investments 26.5 19.5 16.4 17.0 16.9 16.9 11.3 11.9
LT Investment - Affiliate Companies 26.5 19.5 16.4 17.0 16.9 16.9 11.3 11.9
Note Receivable - Long Term -- -- -- -- -- -- -- --
Other Long Term Assets, Total 9.9 10.4 10.9 11.3 11.7 11.0 11.5 --
Deferred Charges 9.9 10.4 10.9 11.3 11.7 11.0 11.5 --
Total Assets 2,223.0 2,184.1 2,177.9 2,147.6 2,074.7 2,042.4 2,044.6 1,587.3
Liabilities ($ Millions)
Accounts Payable 26.4 25.4 27.5 22.5 20.9 19.7 23.5 18.3
Payable/Accrued -- -- -- -- -- -- -- --
Accrued Expenses 39.6 38.6 41.5 45.7 35.9 38.2 43.5 34.9
Notes Payable/Short Term Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Current Port. of LT Debt/Capital Leases 20.2 20.3 20.8 21.4 21.7 19.9 17.4 12.3
Other Current liabilities, Total -- -- -- -- -- -- 0.0 0.0
Income Taxes Payable -- -- -- -- -- -- 0.0 0.0
Total Current Liabilities 86.2 84.2 89.9 89.5 78.5 77.9 84.4 65.5
Total Long Term Debt 556.8 564.9 583.3 599.4 594.4 603.4 620.7 385.7
Long Term Debt 556.8 564.9 583.3 599.4 594.4 603.4 620.7 385.7
Total Debt 577.0 585.2 604.1 620.8 616.0 623.4 638.1 398.0
Deferred Income Tax 194.2 185.9 176.0 165.8 155.9 147.1 137.6 131.6
Deferred Income Tax - LT Liability 194.2 185.9 176.0 165.8 155.9 147.1 137.6 131.6
Minority Interest 555.9 540.9 539.1 527.0 499.9 488.3 486.4 311.0
Other Liabilities, Total 25.7 25.8 25.5 26.2 27.4 26.7 26.0 28.8
Other Long Term Liabilities 25.7 25.8 25.5 26.2 27.4 26.7 26.0 28.8
Total Liabilities 1,418.7 1,401.7 1,413.7 1,408.0 1,356.0 1,343.4 1,355.1 922.6
Shareholders Equity ($ Millions)
Redeemable Preferred Stock, Total -- -- -- -- -- -- -- --
Preferred Stock - Non Redeemable, Net 0.0 0.0 0.0 0.0 0.0 -- 0.0 0.0
Convertible Preferred Stock - Non Rdmbl 0.0 0.0 0.0 0.0 0.0 -- 0.0 0.0
Common Stock, Total 189.8 186.9 185.9 180.8 176.7 175.5 183.9 176.0
Common Stock 189.8 186.9 185.9 180.8 176.7 175.5 183.9 176.0
Additional Paid-In Capital -- -- -- -- -- -- -- --
Retained Earnings (Accumulated Deficit) 614.5 595.5 578.3 558.8 542.0 523.4 505.6 488.8
Treasury Stock - Common -- -- -- -- -- -- -- --
ESOP Debt Guarantee -- -- -- -- -- -- -- --
Unrealized Gain (Loss) -- -- -- -- -- -- -- --
Other Equity, Total -- -- -- -- -- -- -- --
Total Equity 804.3 782.4 764.2 739.6 718.7 699.0 689.5 664.8
Total Liabilities & Shareholders' Equity 2,223.0 2,184.1 2,177.9 2,147.6 2,074.7 2,042.4 2,044.6 1,587.3
2014 2013 2012
16. 15
Appendix 3: Franchise Value Mode
Source: Bloomberg, Internal Student Estimates
)()(
*
*
k
kR
BPS
gk
g
k
BPSROE
P
g Growth of book value per share 16.15%
k Required rate of return 17.31%
BPS Current book value per share 32
ROE Current return on equity 10%
R Future return on equity 19%
P* Fair value for the stock $62.04
Assumptions:
1. Growth of book value per share is derived from a 7-year average growth rate.
2. Required rate of return = 10-year Treasury note + Beta(S&P 500 Expected Return – 10-year Treasury Note)*.
3. Future ROE is derived from the management expectations in conference call.
.
17. 16
Appendix 4: Residual Income Model
Source: Bloomberg, Internal Student Estimates
BPS
gk
kROE
BPSP
g Perpetual growth 13.79%
k Required rate of return 15.74%
ROE Return on Equity 185%
BPS Book Value Per Share $28.20
P Fair Value $61.08
Assumptions:
1. Growth is based on AmSurg’s historical growth, with a discount on acquisition growth.
2. Required rate of return = 10-year Treasury note + Beta(S&P 500 Expected Return – 10-year Treasury Note)*.
3. Required rate of return is calculated using CAPM.
4. ROE is the estimated ROE of the combination of Sheridan and AmSurg.
19. 18
Sources:
Baseline
Bloomberg
Morningstar
Telemet
Yahoo Finance
Business Insider
AmSurg 10-Q
AmSurg 10-K
AmSurg Announcements
AmSurg Transcripts
AmSurg Conference Calls
The Better Business Bureau (BBB)
U.S. Bureau of Economics
Trading Economics Database
U.S. Bureau of Labor Statistics
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might
bias the content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s)
to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The
information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute
investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a
recommendation by any individual affiliated with CFA Society of Orlando, CFA Institute or the CFA Institute Research Challenge with
regard to this company’s stoc
