1. science
2. medicine
3. surgery

Stock Information
Company: AmSurg Corp. Ticker: AMSG Share Price*: $66.04 Market Cap**: $3,372m Daily Volume ($): $20.3m
Recommendation: BUY
1-yr Price Target: $81.00 Downside Risk: $52 Entry: < $66 Add: < $56 Trim/Exit: $81-$86
*-closing price as of 5/14/15
**-assumes full dilution from options and preferred securities.
AMSG an Awesome Beast: Sustainable Growth A Consequence of Being Awesome & a Beast
Investment
Healthcare reimbursements from both the government and private sector have historically proven
Thesis:
insufficient toward offsetting the true economic cost of patient care – a trend we believe will only be
exacerbated as the Affordable Care Act (ACA) continues to roll out in stages of increasing compliance over
the next several years.
While the above factors will continue to create bottom-line uncertainty for healthcare companies, we view
the government’s central role as a “forced buyer”. Thus at a micro-level, we believe the greatest
beneficiaries of healthcare reform will be companies that possess higher economies of scale and a lower cost
structure than peers to benefit from rising demand AND partially offset inherent margin pressure. Within
this mold, our highest conviction idea is AmSurg Corp.
Investment
Highlights:
AmSurg is the single largest owner and operator of ambulatory surgery centers (ASCs) in the U.S. and one of
the five largest outsourced physician services (OPS) providers in the nation. As we highlight below, AmSurg’s
recent acquisition of Sheridan Healthcare, as well as the company’s scale, low-cost operations, and balanced,
acquisitive growth model position AMSG to take advantage of reform-driven demand as well as an implicit
trend toward lower costs of patient care. Importantly, we believe this upside potential is not yet fully
reflected in AMSG shares and recommend purchase at an entry price below $66/share – this represents a
~23% discount to our $81/share intrinsic value calculation over the next 12-months.
Economies of Scale & Market Leadership. AmSurg is the single largest owner/operator of ambulatory
surgery centers (ASCs) in the U.S. with 248 locations across 34 states and its subsidiary, Sheridan Healthcare,
is one of the five largest outsourced physician services (OPS) providers in the nation with leading market
share in anesthesiology (#1), emergency services, radiology (#1), and pediatrics (#2).
Sustainable mid-Teens Revenue Growth from HC Reform and M&A. We believe AMSG can sustainably grow
revenues by 15-20% annually, well above the ~4% long-term growth rate for healthcare services, through a
mix of organic and acquisitive tailwinds, these include:

1) Reform driven demand

2) Trend toward lowering costs – an increasing number of insured lives and falling
reimbursements are driving a focus on cost control. Both of AmSurg’s businesses are favorably
positioned to take advantage of this trend. For instance, a surgical procedure performed at an
outpatient center is typically 1/3 of the cost of the same procedure performed at an inpatient
facility. More stringent mandates by CMS and managed care providers on non-life threatening
procedure should drive above average volumes for ASCs.

3) Highly fragmented markets – in light of the tailwind of reform to AMSG’s organic growth
profile, management presently views acquisitions as a steady supplement to its overall growth in
the coming years. However, we believe the fragmentation of both the ASC and OPS market along
with growing cost pressures could make acquisitions as a steady source of growth for years to
come. For instance, AmSurg’s position as the largest ASC only garners the company 4% market
share (248 locations vs. a total of 5,300 ASCs). Similarly, Sheridan owns less than 2% of the $65
billion OPS market despite its leading positions in anesthesiology, ER, radiology and children’s.
Overlooked Synergies. AmSurg’s July 2014 acquisition of Sheridan Healthcare is anticipated to generate $2030 million of cost synergies on an annual basis. However, we believe there could be as much as $100 million
of additional opportunities that are not yet reflected in consensus estimates, these include:

1) Crossover revenue streams – 95% of AmSurg’s 248 ASCs currently outsource their anesthesia
needs (Sheridan’s #1 OPS offering), yet Sheridan is a service provider to less than 10 of these
locations at present. We estimate that the eventual migration of this business to Sheridan could
result in an incremental $63 million in profits for AMSG.

2) Pipeline for M&A and JVs – Sheridan’s OPS positioning should also serve as a great lead
generator, on the ASC and OPS side, for AMSG’s acquisitive growth strategy. Sheridan generates
the vast majority of its business from hospital systems and a small, but growing base of business
from outpatient surgery centers (over 100 ASCs and many of them located in non AmSurg
markets).
ASC Partnerships/JVs with Hospital Systems Imply Upside. The treatment cost differential of ASCs versus
inpatient settings and AmSurg’s market leading ASC position make the company a logical candidate for a
partnership or JV for large hospital systems – management has also confirmed their openness to such
partnerships if the “numbers make sense”. We estimate that the conversion of only 1 to 2 health systems
per year to ASC partnerships or physician outsourcing relationships could boost new contract growth above
management’s expected range of 2-3%.
Exposure to Favorable Volume Demographics. AMSG is well positioned to benefit from volume growth due
to increased life expectancies. The most commonly performed procedures at AmSurg include colonoscopy,
cataract removal and knee and shoulder arthroscopy. In addition, the company’s ASCs, while located across
34 different states, are over-indexed to Florida, Texas, and California – each markets with high proportions
of seniors. Similarly, 64% of Sheridan’s revenues are derived from Florida.
Risks:
Integration & Execution. Management’s ability to integrate and fully realize synergies from the Sheridan
acquisition, and bolt-on acquisitions that are centric to AMSG’s growth, is the biggest risk in our view. As
with other acquisitive growth stories, the integration process is not completed overnight, nor is it linear.
High Leverage Profile. This is the Street’s biggest knock on the stock. AmSurg’s Debt-to-EBITDA multiple
immediately after acquiring Sheridan was 5.5x. Management’s goal is to lower this ratio under 5.0x by the
end of 2015 and subsequently return to its historical leverage profile of 3.5x to 4.5x. The long-term
deleveraging of the business will largely be determined by the company’s ability to find accretive acquisition
targets. Through 1Q15, AMSG’s leverage stood at 5.1x.
Acquisition Availability. An improving economy and rising M&A multiples in the industry could lead to AMSG
overpaying for OPS/ASC acquisitions or being unable to meet its 7-9% acquired growth target. We believe
this risk is of medium probability in light of the recent Tenet/USPI partnership, however the highly
fragmented nature of AMSG’s target markets and declining reimbursements should offer plenty of
opportunity and incentive for consolidation.
Repeal of the ACA. There are several impending legal challenges to the ACA that are being heard presently
by the SCOTUS. An adverse ruling, while unlikely to lead to a repeal of the legislation, could be a major nearterm setback for healthcare stocks in general. This overhang is unlikely to abate until the end of 1H15 when
the courts issue their final opinions. Note however, that AMSG faces low-risk relative to peers given its small
self-pay and government payer mix. AmSurg and Sheridan have 25% and 23% Medicare and Medicaid payor
mixes, respectively. In addition, Sheridan has only 6% private pay compared to 59% from managed care.
Valuation:
Amsurg Corporation
Sum-of-the-Parts Valuation
$ in MMs, except per share data
Physician Outsourcing
TeamHealth
Envision Healthcare Holdings
MEDNAX
Average
Implied EV for AMSG - Sheridan
2015E
EV/EBITDA
13.6x
13.0x
12.0x
12.9x
$2,978.6
Ambulatory Surgery Centers
Surgical Care Affiliates
14.2x
Implied EV for AMSG - AmSurg
$3,287.3
Gross Enterprise Value
Less: Net Debt as of 3/31/15
Implied Market Cap
$6,265.9
($2,133)
$4,133.2
Implied Share Price
$80.95
Amsurg Corporation
Estimate & Valuation Summary
$ in MMs, except per share data
Current Price
EPS
P/E
Implied Target P/E multiple
$
66.04
Adjusted EBITDA (net of Minority Interest)
Equity market value
Net Debt as of 3/31/15
Enterprise Value
Current EV/EBITDA
Implied Target EV/EBITDA multiple
Target Price
Upside to target price
Fully Diluted Shares Out (millions)
$
81.00
23%
51.1
2014
$2.75
24.0x
29.5x
2015E
$3.41
19.4x
23.8x
2016E
$3.95
16.7x
20.5x
2017E
$4.56
14.5x
17.8x
$294
$3,372
$2,133
$5,505
18.7x
21.3x
$463
$3,372
$2,133
$5,505
11.9x
13.5x
$520
$3,372
$2,133
$5,505
10.6x
12.1x
$596
$3,372
$2,133
$5,505
9.2x
10.5x