Despite A Q3 Beat The Rally In Amedisys Stock Appears Overdone

After a 82% rise since the March 16 lows of this year, at the current price of around $249 per share we believe Amedisys stock (NASDAQ: AMED), a home health and hospice care company, has reached its near-term potential. AMED stock has rallied from $137 to $249 off the recent bottom compared to the S&P which moved 37% over the same period, with the resumption of economic activities as lockdowns are gradually lifted. AMED stock is also up a whopping 385% from levels seen in early 2018, two years ago.

Some of the 385% rise of the last 2 years is justified by the roughly 29% growth seen in Amedisys AMED ’ revenues from 2017 to 2019. Also, the company managed to expand its Net Margins by 48% to 7.4% on an adjusted basis, which translated into a 2x growth in earnings. Given the growth in revenues and margins, the company’s P/E Multiple has also expanded. We believe the stock is likely to see downside despite the recent uptick and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 385% Change in Amedisys Stock between 2017 and now?‘, has the underlying numbers.

Amedisys’ P/E multiple changed from 23x in 2017 to 37x in 2019. While the company’s P/E is 57x now, there is a potential downside risk when the current P/E is compared to levels seen in the past years, P/E of 24x at the end of 2017, and P/E of 31x in 2018.

So what’s the likely trigger and timing for downside?

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The global spread of Coronavirus has meant a decline in home health and hospice services due to social distancing and restrictions on movement. That said, the company recently announced its Q3 results, which were better than estimates, led by a rebound in hospice care. Total revenue increased 10% y-o-y to $544.1 million, while the adjusted earnings of $1.52 per share (excluding the tax benefits) reflect a 32% growth over the $1.15 figure reported in the prior year quarter. The company has now raised its full year guidance for revenues to top $2.06 billion with earnings to be $6.05 on a per share and adjusted basis at mid-range, compared to revenues of $1.96 billion and earnings of $4.52 in 2019. Amedisys completed the acquisition of AseraCare in June this year, strengthening its hospice care business. The company now offers its services at over 500 locations in the US, and its revenues and earnings are expected to grow at a steady pace over the coming years. That said, much of these factors appears to be priced in the current stock value of $249, despite the expected recovery in demand post Covid.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. At levels of around $250, AMED stock is trading at 41x its 2020 expected EPS of $6.05. This compares with P/E of 23x and 31x seen in 2017 and 2018 respectively, making the stock appear vulnerable to downside risk.

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