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MEDNAX, Inc. Reports Strong Quarter, Solid Outlook, Big M&A Pipeline

Before the markets opened on Thursday, Mednax reported what we characterize as solid third quarter 2014 results. More specific, earnings per share were $1.32—$0.04 above the consensus forecast of $1.28 and above the high end of management’s $1.25 to $1.30 guidance. Sales registered at $473.1 million—up 16.1% from the prior-year period and modestly above the $469.9 million consensus forecast. Cash flows were again very strong with operating cash flow at $134.7 million—or roughly 205% of net income

On a same-unit basis, the company reported sales growth of 2.5%, toward the high end of management’s 1.0% to 3.0% guidance. Same-unit reimbursement increased 60 basis points year-over-year, driven by commercial price increases and continued growth in hospital administrative fees, which helped offset an 80-basis-point year-over-year shift toward government payers. The remaining same-unit sales increase came from overall same-unit volume growth of 1.9%, with the NICU business experiencing very solid same-unit volume growth of 3.7%—the second-best NICU volume growth metric the company has posted since late 2007.

Similar to previous quarters, management provided forward-quarter EPS guidance, expecting fourth quarter 2012 EPS to fall in the range of $1.27 to $1.32, compared with the Street’s estimate of $1.29. The outlook is based on estimated same-unit sales increasing between 2.0% and 4.0%. Same-unit volume growth and same-unit reimbursement growth are expected to each contribute equally to fourth-quarter organic sales performance.

On the stock, we continue to like Mednax and believe shares offer investors an attractive risk/reward profile, trading at about 13 times our current 2015 EPS target. Moreover, we believe the pending Medicaid-to-Medicare rate parity combined with continued momentum on the M&A front could add upside to our 2015 EPS target. In turn, we reiterate our Outperform rating and recommend purchase of MD shares

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