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AmSurg Reiterated at Neutral

Zacks Equity Research

We have reiterated our Neutral recommendation on AmSurg Corporation (AMSG) with a target price of $29.00.

Even amidst headwinds like reimbursement issues, higher expenses and economic uncertainty, AmSurg reported earnings per share (EPS) of 51 cents in the second quarter of fiscal 2012, up 21% year over year. Reported EPS was also ahead of the Zacks Consensus Estimate by a penny and remained at the higher end of the company’s guidance range of 49−51 cents.

AmSurg has also been able to deliver a satisfactory progress with the third consecutive quarter of over 20% sales growth. During the quarter revenues increased a robust 23% year over year to $231.6 million and exceeded the Zacks Consensus Estimate of $229 million. This was primarily driven by the addition of several new centers through acquisitions and development of additional ambulatory surgery centers (:ASC).

The company exited the quarter with 147 centers performing gastrointestinal endoscopy procedures, 39 centers performing procedures in multiple specialties, 35 centers performing ophthalmology procedures and seven centers performing orthopedic procedures. Demand for lower-risk, high-volume surgical procedures performed by ASCs continues to grow, consistent with the demographics of an aging U.S. population.

We are also encouraged to note that during the quarter there was a 3% rise in same-center revenues which followed a huge 5% growth in the first quarter (the best same-center performance since 2007). The significant increase in same-center revenues represented the fifth consecutive quarter of increase, on the back of which, the company increased the low end of its same-center revenue growth forecast to 2−3% from the previous guidance of 1%−3%.

Moreover, with a strong cash balance and revolving credit facility, AmSurg is well poised to pursue further acquisitions that will boost its top line going ahead. The company is even looking for potential large-chain acquisitions.

We are also encouraged to note that many physicians prefer ASCs because these centers provide greater scheduling flexibility, more consistent nurse staffing and faster turnaround time between cases, allowing them to perform more surgeries in a specified time period.

Moreover, ambulatory surgery is comparatively less expensive than hospital-based surgery due to lower facility development costs, more efficient staffing and space utilization. We expect all these factors to work in favor of the company.

However, economic uncertainty together with unemployment led to fewer individuals enjoying company-provided insurance, which impacted elective procedures such as hip and knee replacements, as well as screening procedures such as colonoscopies. Further, ASCs are highly dependent on third-party reimbursement programs including governmental and private insurance programs to pay on behalf of patients.

We have concerns regarding AmSurg’s dependency on Medicare for payments, given that the company derived 29% of its revenues from governmental healthcare programs, primarily Medicare during fiscal 2011. Moreover, AmSurg has been facing significantmargin compression in the last few years. Besides, the competitive landscape is tough with the presence of players such as HCA Holdings, Inc. (HCA).

Presently, AmSurg has a Zacks #2 Rank (short-term Buy rating).

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