AMSG Amsurg Corp.

We have reiterated our Neutral recommendation on AmSurg Corporation (AMSG) with a target price of $28.00.

In the face of headwinds such as reimbursement issues, higher expenses and economic uncertainty, AmSurg’s adjusted EPS for the fourth quarter of fiscal 2011 came in at 46 cents, in line with the Zacks Consensus Estimate but ahead of the year-ago quarter EPS of 43 cents.

The quarterly result includes a negative impact of a penny related to the revision of the Medicare payment system for ambulatory surgical centers (ASCs). Operations of the acquired NSC centers contributed 4 cents to net earnings during the quarter.

However, AmSurg has managed to deliver strong revenue growth during the reported quarter (up 22% year over year and above the Zacks Consensus Estimate) primarily driven by the addition of several new centers through acquisitions and development of additional ASCs. Demand for lower risk, high volume surgical procedures performed by ASCs grew steadily during the quarter, consistent with the demographics of an aging US population. In late 2011, the company acquired National Surgical Care (NSC) for a cash consideration of $124.5 million. The growth in procedures for the fourth quarter was primarily driven by the NSC acquisition that added 14 multi-specialty centers.

For the full year, the company added 11 non-NSC centers, consisting of 10 acquired centers and 1 de novo. The non-NSC centers acquired in 2011 generated annualized operating income of approximately $29 million. Meanwhile, we are encouraged by the company’s same-center growth of 1% in 2011 (the company reported a decline of 2% in same-store sales last year) on the back of positive (though nominal) same-center revenue growth over the last three quarters.

Moreover, with a strong cash balance and extended 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.

However, the prevailing economic uncertainty led to lower doctor visits as well as deferred elective procedures affecting surgical volume. As a result, the company witnessed significant pressure on same-center revenues.

Further, ASCs are highly dependent on third-party reimbursement programs including governmental and private insurance programs to pay on behalf of patients. We remain concerned regarding AmSurg’s dependency on Medicare for payments, given that the company derived 29% of its revenues from governmental healthcare programs, particularly Medicare, during fiscal 2011.

Notwithstanding these headwinds, we expect AmSurg to benefit over the long term from favorable industry dynamics. For the past few years, government programs, private insurance companies and managed care organizations have implemented various cost-cutting measures to limit healthcare expenditure. Ambulatory surgery is comparatively less expensive than hospital-based surgery due to lower facility development costs, more efficient staffing and space utilization.

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

 
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