AFFX Affymetrix, Inc.

Home healthcare provider Amedisys Inc. (AMED) recorded adjusted (after adding back for exit activity costs, gain on sale of care centers and legal fees) earnings per share of 17 cents in the second quarter of 2013, a massive downfall from 29 cents in the year-ago quarter. Apart from the declining top line, margin contraction and higher share count led to the earnings downfall. Per management, the sequestration cut and volume decline adversely affected bottom line by 9 cents. However, the result sailed past the Zacks Consensus Estimate of 10 cents.

On a reported basis, Amedisys posted net income of $1.8 million or 6 cents per share in the second quarter, a considerable slide from net income of $7.9 million or earnings of 26 cents in the prior-year quarter.

Quarter in Detail
 
Amedisys primarily derives revenues from its home health and hospice agencies. Second-quarter net service revenue came in at $313.1 million, down 13.7% year over year. The adverse impact of sequestration hurt revenues by about $5 million while the remainder of the downfall was on account of significantly low volumes in its segments. Revenues also trailed the Zacks Consensus Estimate of $326 million.
 
For the company’s Home Health division, net service revenue was $248.6 million (down 14.5% year over year) with Medicare revenues of $202.9 million and non-Medicare revenues of $45.7 million in the quarter. The decline was due to lower recertification, sustained volume pressure and the impact of sequestration.

For the hospice division, net service revenue was $64.5 million (down 11% year over year) including Medicare revenues of $60.8 million and non-Medicare revenues of $3.7 million in the quarter. Lower admissions in the quarter and the sequestration cut led to the decrease in segment revenues.
 
The company reported a 40 basis points (bps) contraction in gross margin to 43.8% in the quarter. Expenses on salaries and benefits declined 10.1% to $74.6 million, while other expenses decreased 9.9% to $41.1 million. Amedisys posted operating margin contraction of 220 bps to 4.9% in the quarter.
 
Amedisys exited the quarter with cash and cash equivalents of $30.1 million compared with $14.5 million at the end of 2012. The company’s long-term obligations (including current portion) were $74.8 million compared with $1,027.1 million at the end of 2012. Net cash provided by operating activities in the quarter was $33.6 million, up 54.5% year over year.

Outlook
 
Following another weak quarter, Amedisys tweaked its sales guidance for 2013. Net service revenue is envisaged in the range of $1.24-$1.28 billion compared with $1.28-$1.32 billion earlier. The Zacks Consensus Estimate of $1.31 lies outside the revised guidance.

The company continues to envisage earnings per share in the range of 45 to 55 cents. The Zacks Consensus Estimates of 51 cents for 2013 is within the outlook band.
 
Our Take
 
Amedisys posted another weak quarter with sustained volume pressure. Although the company’s earnings surpassed the Zacks Consensus Estimate, it missed the Zacks Consensus Estimate for top line for the fourth consecutive quarter. We believe that poor segment performance, sluggish growth trend and the adverse impact from sequestration led to the dismal second-quarter results. The revised sales 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 further.
 
Accordingly, we prefer to avoid Amedisys. The stock carries a Zacks Rank #4 (Sell). On the other hand, medical sector stocks worth considering are Affymetrix Inc. (AFFX), Thoratec Corp. (THOR) and Align Technology Inc. (ALGN). These stocks carry favorable Zacks Rank #1 (Strong Buy).

 
AFFYMETRIX INC (AFFX): Free Stock Analysis Report
 
ALIGN TECH INC (ALGN): Free Stock Analysis Report
 
AMEDISYS INC (AMED): Free Stock Analysis Report
 
THORATEC CORP (THOR): Free Stock Analysis Report
 
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