The Little Analyst

A little analyst's musings about markets, money, investing, business, and whole lot of other stuff he's figuring out. Feel free to tell him what you think.

Equity Research: AMN Healthcare Services (AHS)

Today is a day filled with stock research as I churn out stuff for my school’s investment group, as well as myself. Here’s some info I’ve had sitting on a company for a few weeks (been busy as hell with work, not much time to post).

AMN Healthcare Services

What they do:

  • Healthcare staffing (meaning they fill spots for nurses, doctors, and etc when hospitals need them)
  • Operate mainly in the US, based in San Diego (my hometown!!!)
  • They make money from billing the hospital per worker (nurse, physician, technician), paying each worker for living, transportation, and other basic costs as part of their contract, and keeping the “spread”
  • Remember substitute teachers? In a way, their nurses and physicians are like that, they fill temporary staffing needs

The industry:

  • Healthcare spending obviously has taken a hit, as more unemployment drives more to visit the doctor less. This drives down demand for healthcare services
  • Things are turning around. As the economy improves (or will it? see my last post), more people are getting their long-needed healthcare
  • Nurse staffing, which accounts for 1/2 of AMN’s revenue, is turning from demand constrained to supply constrained. Demand has picked up, but supply? Check out the nursing shortage:

In addition, nursing school enrollment hit a 7-year low in growth in 2008. It’s picked up slightly, but seeing that nursing programs take 2-4 years to complete, we’ll be seeing a low point in nursing grads right about…now. Hospitals need to ensure that they have a well-stocked supply of high-quality nurses, which is where businesses like AMN Healthcare and Cross Country (it’s rival) come in.

Why it’s better than its competitor, Cross Country (CCRN)

  • Scale, scale scale. The goal is to have as much exposure and as much services offer-able to as many hospitals (potential clients) as possible
  • AHS recently acquired Medfinders, a company that does similar but slightly differentiated services. They offer shorter placement assignment nurses (1 day, 1 week vs 13 week or permanent), as well as managed services software
  • What are managed services? Essentially AMN Healthcare and Cross Country fight to become the exclusive all-things-HR and logistics vendor for large hospitals. The Medfinders acquisition, scale, and already-signed deals demonstrate a great potential for AMN to latch on to more lucrative contracts
  • Oh no, what if the acquisition doesn’t integrate well? Well synergies have already started to take place, with SG&A and other costs being mildly stabilized
  • In addition the acquisition of Medfinders has opened the small but high-margin and high-growth sector of Home Health -  basically staffing professionals to take care of patients, well, in their home! Of AHS’s multiple sectors, this one sees the highest growth potential and margins
  • Overall they’re both great companies, but AMN (ticker AHS, sorry if its confusing) simply is in a better position to profit from healthcare recovery

Valuation

  • The key value driver for AMN is whether healthcare revenues will recover from pre-recession heights. It’s a rather simple question…yes, right? People will always need health help, and even if they spend less per capita, I’m confident organic growth in patient counts will eternally drive healthcare spending…its why hedge funds always run to healthcare in bad times…its non-cyclical (to an extent)
  • did I mention that none of the business AMN or its competitor operates in are directly affected by Medicare/Medicaid? (That’s dealt by the hospital, though there is definitely indirect effect, as with everything). So take that, cuts!
  • Its difficult to do comps and such with an industry dominated by just 2 companies, but AMN trades at just 7.4 times its 2007 (pre-crash) earnings, while CCRN trades at 8.4. Not enough difference to make a difference, but it also trades at a lower P/E when it comes to consensus 2012 earnings.
  • I made a DCF to assess what its intrinsic value would be, assuming a few things:
  1. Nursing, Permanent physician, and home health segment revenues would spike up quite a bit after this year because of the Medfinders acquisiton (to be safe, I projected slightly lower than analysts)
  2. Locum Tenens (temporary physician) segment growth wouldnt grow too much since current macro trends show that physicians concerned of healthcare legislation are seeking permanent hospital employment rather than being temp workers
  3. Gross margins would improve just slightly thanks to Home Health
  4. SG&A expenses as a percent of revenue would decrease just slightly thanks to the acquisition
  5. Interest expenses remained somewhat above average though predictable (higher because of acquisition and financing costs), tax rate remained at 55%

The pro forma income statement looked like this:

And assuming a discount rate based on a WACC of 9-ish percent, the Unlevered Free Cash Flow calculation and terminal value (calculated using 2007 EV/EBITDA, the pre-recession value, meaning I expect that ratio to heal back to pre-recession heights by 2015 or so—I also used the perpetuity method with a growth rate of ~3%) looked like this:

In the end, a share price of roughly 9-10 bucks can be implied (keep in mind all my estimates were slightly lower than analysts, which I view with some skepticism). Compare that with the current price of $8, and we’re seeing a 20-25% upside. I’m still wary of the stock—macro headwinds like legislation effects and unemployment are always hard to forecast and model. But I highly recommend buying it with caution.

(Source: seekingalpha.com)

The Economy, and Unemployment

America’s unemployment rate has been progressing sluggishly enough. But oh wait, people dropped out of the workforce, not actually getting a job? I remember hearing about this in December, its tough to see it quantified.

It gets me thinking about the US economy, and its future in general. Many people wonder when and how the economy will improve, in the short and long term. I allude to the Morningstar article published a few weeks ago by Rob Arnott.


Consider a simple thought experiment. Let’s suppose the government wants to dazzle us with 5% growth next quarter (equivalent to 20% annualized growth!). If they borrow an additional 5% of GDP in new additional debt and spend it immediately, this magnificent GDP growth is achieved! We would all see it as phony growth, sabotaging our national balance sheet—right? Maybe not. We are alreadyborrowing and spending 2% to 3% each quarter, equivalent to 10% to 12% of GDP, and yet few observers have decried this as artificial GDP growth because we’re not accustomed to looking at the underlying GDP before deficit spending!


http://news.morningstar.com/articles/perspectives/116347/does2unreal2gdp2drive2our2policy2choices.aspx?t1=1307822197&part=1


And hence, as he concludes, the US GDP has not truly grown since the 1990’s. This is done by calculating GDP (consumption, investment, government spending, and net exports) NOT fueled by government debt.


In other words, the amount of US products and services demanded by the world and bought by the world has not increased since 1990. When you take out the amount of goods/services that were bought via government spending backed by debt.


And since the absolute, nominal GDP has increased (quite nicely, too) since 1990, this just means we have had an increasing debt load ever since. Meaning our “growth” has not been organic (not based on any innovation, improvement in capital, or resources). 

IPO Alert: GROUPON

I just read a WSJ article on the upcoming Groupon IPO, and I’m amazed.

http://blogs.wsj.com/deals/2011/06/02/groupon-ipo-its-here/

I had no idea Groupon was making 644 MILLION revenue in the last quarter. That to me is incredible, probably since I’ve never used Groupon (doesn’t interest me), and don’t actually know many people who do. How much revenue does it make per deal bought? A few cents? A buck? A few bucks? Regardless, the idea that 300-600 million deals (maybe more) are bought on Groupon in a quarter (so at least 3.3 million deals a day, at least 382 deals a second) seems ridiculous to me.

But I have a queasy feeling this might not be the greatest investment ever. A $20 Billion valued company offering $1 billion in IPO? Please! How is Groupon worth $20B?

Everything about Groupon seems lacking of a moat. Its business model is very copy-able, and Facebook Deals looks like its doing the same thing on a greater network. And there hardly seems to be operating leverage, characteristic of many web/social media companies:

The company said it expects its “operating expenses will increase substantially in the foreseeable future as we continue to invest to increase our subscriber base, increase the number and variety of deals we offer each day, expand our marketing channels, expand our operations, hire additional employees and develop our technology platform.”

Don’t get me wrong. The idea behind Groupon is very creative. So is selling magical lemonade. I just don’t get how it’s profitable, and to an extent, unique. It’s “social media,” but lacks a truly viral network like Facebook or even Linkedin. And if people like to rag on Linkedin for being pricey all the time, there’s no reason why Groupon should be heralded. I’m thinking there might be great hype and gains in the stock in the initial months, but in the long term, I’m very bearish.

Anonymous asked: Kevin first off why are you so cool? Second of all, If I wanted to be the average investor is it better diversify in stocks or spread my savings across MFs, bonds, and stocks?

For purposes of saving, I would recommend always spreading among stocks and bonds. If you’re young and don’t need to touch savings for a while, put more in stocks. Now, stocks and bonds can be confusing, so if you don’t want to learn a great deal about investing, buy mf shares. Managers of mutual funds will invest for you, taking some of the gain for themselves. Focus on mfs that hold bonds and stocks. Assuming you pick good funds, you should see equivalent returns without having to actively manage your money.

How Much Can I Make From a Mutual Fund?

My girlfriend asked me the other day for investment suggestions for her savings. Rather than give her my thoughts on National Oilwell Varco and other stock picks, I decided the best way for low-maintenance savings would be to pile some in a CD, and pile the rest in mutual funds.

This seemed fine, until we began reading some mutual fund prospectuses and it became clear that without a bit of explanation, its pretty hard to understand and quantify how fees impact returns and the like for an average savings investor. 

So I built a very simple Mutual Fund Returns Model (see download link below). A screenshot: 

It’s pretty simple to see what you could be making/losing over 5 years. Just input your initial investment (most funds require at least $2,000) in “Value of Investment” under Year 0. Then input the growth rate (you’ll have to guess here, see how the fund has done historically, compare that to the market to assess managerial ability, then see what projections are for the market in the coming year). Play around with the growth rate.

Finally, input a percentage for “fees.” Well-written prospectuses will have clearly stated fees, a sum of the percent value of your investment you will have to give up each year to the fund for the managers’ salaries, operations, etc. You’ll then be able to see the expenses for each year in $ (hopefully growing as your investment value grows), your accumulated expenses, your investment value at the end of each year, and your accumulated gains. Again, taxes aren’t factored in this model, and capital gains taxes could range from 0% to 15% of “what you’ve gained,” so carefully figure out your tax situation.

The default inputs are based off a minimum investment for a popular fund, the Dodge & Cox Stock Fund. This fund’s operating fees total 0.52% of investment value per year, and 10% growth per year is not a crazy estimate, given its managerial skill and market conditions.

But thats just something to keep readers at bay until the next time I can do some equity research/valuation type stuff. Happy reading, happy investing!

Download link (in Excel): http://www.mediafire.com/?c73tcx3053pbmlz

(Source: dodgeandcox.com)

More Equity Research: National Oilwell Varco (NOV)

The accompanying image is a quick Price Ratio Analysis I did on NOV. Comparable companies included: Dresser-Rand (DRC), Cameron Holdings (CAM), FMC Technologies (FTI), Tenaris SA (TS), and the like.

Long story short, relative to its peers, NOV is undervalued when seen through P/E, P/S, and P/B. If the market were to value it equal to its peers’ averages, it would have an implied upside of 28-30%.

Now simplistic valuations like these aren’t known to be super precise. And this is all based on yesterday’s values, so its a little off (did this yesterday, posted today). But its just another exercise I run suspiciously good and undervalued stocks through. Check it out. Tell me what you think!

Keywords: excel commands, excel, price ratio analysis, national oilwell varco, price to earnings, price to sales, price to book

Equity Research: National Oilwell Varco (NOV)

BUY THIS: This stock came up on my radar not too long ago. Long story short, its a supplier for oil drillers providing three products (as far as my due diligence can tell):

  1. systems and components for drilling (the big stuff, rigs, etc.)
  2. “downhole” tools and services (the small stuff: thanks to a smart acquisition they have a good share of the piping market, among other things)
  3. Supply chain integration (the invisible stuff: project management, etc)

It can be gathered that demand for all three is tied to the first. And demand for “the big stuff” is driven by aging rigs that are due for replacement worldwide, as well as increased gov’t push for drilling, particularly offshore that will spur demand for NEW rigs.

So in the big picture, the businesses its in are good. Small picture? The company has solid, improving margins, cash flow generation, and a damn good debt profile (LTD to Cap: 3.1%, far below competitors).

It’s taken a hit lately, as can be seen below:

The drop in late April was due to some crappy earnings that weren’t so crappy after all. Analysts expected $1 EPS, NOV delivered 96 cents. Why lower? A write-off of Libya assets, mainly, caused earnings to shrink. Without the write-off, earnings would have been $1, according to the quarterly report. I think this is a classic case of market overreaction, with the stock dropping 15-20% for some one-time hit that was totally not related to operational performance. So this is a good thing for investors now.

Smelling the money, I decided to run a comps analysis (I’m still figuring out all this stuff, so please berate me. 

With special attention paid to CAM (cam holdings) and DRC (Dresser Rand), two most similar companies that supply oil rig equipment, it can be seen that from this quick-and-dirty analysis, NOV is clearly underrated at a current share price of $71. So assuming the market with eventually realize NOV’s value near or at the level of its peers, the potential upside is 24%. Interesting.

(Note: I forecasted future EBITDA by multiplying forecasting EPS by diluted shares outstanding, and added back my “guess” at future interest, taxation, and D&A—which I used mostly historical and intuitive estimates—so I may be wrong. Tell me if theres a better quick way to do this.)

But hey, from what I see so far, this looks like a good stock. I plan to run a DCF (super simple, probably will just use a template to get an idea) today, to confirm my comps findings. But tell me what you guys think!