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Why Amedisys Shares Sank

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of home health care services provider Amedisys (Nasdaq: AMED  ) are crawling back into bed today, falling as much as 11%, after announcing a new health services contract with Humana (NYSE: HUM  ) .

So what: A new contract and the stock is down...€“ "What gives?" right? Well, the reason Amedisys is tanking has to do with the fact that the new home health services contract will be paid out on a per-visit basis as opposed to a previously agreed upon episodic basis. Because of this, Amedisys expects to generate only half of its normal $65 million-$70 million in revenue that it usually generates annually from its relationship with Humana. Management noted the reduction in revenue will begin in the fourth quarter.

Now what: The fact that Amedisys is having to rework some of its health services contracts really isn't a surprise. What we need to remember is that today's revenue reduction from the Humana deal lops about 2% off of future revenue, yet the stock is shedding in the low double digits. That seems to be a bit of an overreaction. I also feel it's worth pointing out that while the Affordable Care Act will constrain health care service providers' ability to boost pricing, it should bring a new class of insurable patients into health care insurers' networks. Ultimately, I feel the ACA could cause Amedisys' revenue to head higher consistently, and I consider the company a tempting value play here.

Craving more input? Start by adding Amedisys to your free and personalized Watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Related Tickers

10/21/2016 4:00 PM
AMED $43.86 Down -1.29 -2.86%
Amedisys CAPS Rating: **
HUM $175.88 Up +1.33 +0.76%
Humana CAPS Rating: ****