Why Amedisys Inc. Stock Soared

Amedisys updates its second-quarter preliminary view and shocks Wall Street and investors.

Jun 27, 2014 at 2:15PM

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 Amedisys (NASDAQ:AMED), a provider of home health and hospice care throughout the U.S., surged as much as 20% after providing an upbeat forecast for the second quarter.

So what: According to its second-quarter preview, issued before the opening bell, the company now anticipates revenue will be in the $300 million-$305 million range with EPS from continuing operations of $0.15-$0.20. In lieu of the Amedisys' prior decision to consolidate some of its care centers and lower general and administrative expenses, it witnessed better-than-expected gross margin, and thus improved profitability. By comparison, Wall Street consensus had Amedisys delivering breakeven EPS on nearly $297 million in revenue for Q2, so its preliminary view was notably better than the Street's view. Amedisys, however, still took a cautious tone for the remainder of the year, mostly due to business seasonality and the fact that most of its margin-improving initiatives are still in their early stages.

Now what: There is perhaps no sector that is tougher to get a read on than home health and hospice care providers. On paper this sector would appear to be an incredibly smart long-term play. With baby boomers beginning to retire the potential need for home health care is likely to increase significantly over the coming two decades. Not to mention, life expectancies and population are also on the rise, boding well for these companies over the long term.

Yet, Amedisys and other home health companies tend to be somewhat reliant on Medicare and Medicaid reimbursement. With the passage of the Affordable Care Act and Congress looking for ways to reduce the federal budget deficit, both Medicare- and Medicaid-reliant businesses could be staring down a steady decline in reimbursements over the remainder of the decade. As for me, similar to Amedisys I hold out cautious optimism for the company, but wouldn't suggest immediately chasing it higher after today's pop.

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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.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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