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
- 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
- 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:
- 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)
- 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
- Gross margins would improve just slightly thanks to Home Health
- SG&A expenses as a percent of revenue would decrease just slightly thanks to the acquisition
- 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.