AMN - AMN Healthcare: Close To Be A 'Buy'

2023-09-21 08:53:53 ET

Summary

• AMN Healthcare Services is a leading healthcare staffing company with strong competitive advantages and a broad range of services.
• The company is well-positioned to benefit from long-term trends driving demand for healthcare staffing.
• However, the current price of AMN's stock does not offer a wide margin of safety, making it a 'Hold' recommendation.

Introduction

AMN Healthcare Services, Inc. ( AMN ) is a leading healthcare staffing company that provides a broad range of staffing services to healthcare organizations. AMN is well-positioned to benefit from the long-term secular trends driving demand for healthcare staffing, such as an aging population and a shortage of physicians and nurses. AMN has a number of competitive advantages, including its strong brand reputation, seamless operation efficiency, and a broad range of staffing services. However, it keeps being a 'Hold' as the current price does not offer a wide margin of safety.

Competition

AMN is in a highly competitive industry full of local, regional, and national competitors that offer similar staffing services. However, AMN stands out from the rest owing to its commitment to offering the best quality services at the best price while providing outstanding customer service. Consequently, AMN is top-ranked in pricing (which is surprising given the firm keeps wide profit margins) and customer service by Comparably , and it’s in the second position (after HealthStream) in product quality and Net Promoter Score (NPS). Furthermore, it has been awarded by HRO Baker’s Dozen as the winner in the Customer Satisfaction Ratings in 2023, 2021, and 2020. However, Aya Healthcare (a private competitor) ranked better than AMN in Forbes America’s Best Temporary Staffing Firms 2023 but was the only competitor better than AMN.

Moreover, differentiating from smaller competitors, AMN was awarded by The Joint Commission International, which increased customers’ trust in the company. I think it boosts word-of-mouth, positioning AMN in a preferred position concerning most of its competitors. Additionally, customers are unlikely to change to other providers if they are satisfied.

In addition, unlike Cross Country Healthcare ( CCRN ), AMN already has operational Vendor Management Systems (VMS), which facilitate customers' talent management processes, such as payroll, talent sourcing, time and attendance tracking, credentialing, compliance tracking, forecasting, etc. However, Cross Country expects to have its VMS fully operational by 2024. HealthStream ( HSTM ) has focused uniquely on developing a leading VMS from which the company derives its revenue by charging subscription fees based on the number of customer services used.

I believe AMN has another competitive advantage: cross-selling, as the firm offers a broader range of staffing services than most competitors. It allows AMN to create deeper customer relationships and be an unconditional partner for many healthcare facilities. Furthermore, AMN improves the efficiency of staffing processes when it offers all the services at once, creating synergies among services and maintaining costs as low as possible.

I think that the combination of high customer satisfaction, VMS, and comprehensive staffing services put AMN in an advantageous position in the industry, as small players cannot offer an exhaustive list of staffing services, cannot maintain economically viable VMSs, and do not enjoy favorable publicity as AMN. Nevertheless, some small competitors specialize in one type of staffing and could monopolize a niche market. According to Staffing Industry Analysis , 81 firms have 90% of the temporary healthcare staffing market, and only 5 have a greater market share than 4.1%. Thus, the market remains relatively fragmented, raising opportunities for acquisitions and consolidation.

Nonetheless, an essential weakness of AMN relative to competitors is its lower worker satisfaction, as it ranked third in overall culture score (behind HealthStream and Cross Country) and fourth in Employee Net Promoter Score by Comparably . Likewise, its overall rating in Glassdoor is 3.8, with a CEO approval of 72%; meanwhile, Aya Healthcare and HealthStream have overall ratings of 4.3 and 3.9. However, AMN holds a higher overall rating than Cross Country (3.5) and Maxim Healthcare Staffing (3.6).

The qualitative factors mentioned above reflect the financial performance of AMN in comparison to other public competitors. First, the ten-year median operating margin of AMN is 9.2%, while in the case of Cross Country, it is barely 2.9%, and for HealthStream, it is 6.1%. In this sense, the median ROIC of AMN is 14.9%, and Cross Country and HealthStream median ROIC are -1.6% and 3.9%, respectively. Moreover, in the last ten years, revenue and EPS have grown 18.6% and 38.9% annually. The company holds a healthy balance sheet with a debt that can be paid in 4 years using its free cash flow. However, it’s worth noting that Cross Country grew faster in 2021 and 2022 than AMN and improved its operating margin, closing the profitability gap; besides, its ROIC rose higher than AMN’s ROIC. However, in the past, Cross Country has shown inconsistent financial performances.

Lastly, I think mid-size barriers to entry protect AMN, as it has achieved a strong brand reputation and seamless operation efficiency thanks to all the staffing services it offers. Moreover, I believe initiatives such as the AMN Passport cause network effect barriers, especially when the AMN Passport is the most downloaded healthcare staffing app , with over 200,000 downloads. Thus, as more healthcare workers are in the app, more healthcare companies will use uniquely AMN Passport to look for nurses and physicians. Additionally, as more sales come from Manage Service Programs (MSPs), there are higher barriers to entry as the contracts under MSPs limit the ability of a healthcare provider to purchase services from other staffing companies unless these companies have a relationship with AMN through its MSPs.

Industry

According to Grand View Research , the US healthcare staffing market is expected to grow at a CAGR of 6.69% until 2030, driven by an 80% increase in the population older than 65 years old, who are three times more prone to stay the hospital and twice inclined to visit a physician’s office. Conversely, Precedence Research estimates an annual growth of 5.6% for the US market.

Likewise, another important driver is the need for more physicians and nurses. According to the Association of American Medical Colleges , the physician shortage is projected to be between 38,000 and 124,000 physicians by 2034, and according to McKinsey & Company , there will be a nationwide shortage of between 200,000 and 450,000 nurses available for direct patient care by 2025.

In addition, as hospitals need to be flexible and run at the lowest cost possible, they need to manage their workforce to reduce costs and keep a flexible cost structure that allows them to deal with peaks and troughs of demand. Moreover, according to Grand View Research , a travel nurse tends to have a higher salary than fixed nurses, which generates incentives not to be a fixed nurse.

Therefore, AMN will experience long-term tailwinds that, I think, will allow it to grow at a high single-digit in the next five years.

Nevertheless, AMN Healthcare's staffing demand is slowing down in 2023 but is still expected to remain above pre-pandemic levels. The COVID-19 pandemic and the "Great Resignation" significantly impacted demand for AMN's services in 2020, 2021, and 2022. With the pandemic easing, demand for travel nurses has declined substantially, but demand for allied health professionals remains strong. Healthcare organizations are hiring more permanent staff (to reduce the cost of contingent hiring) but are still facing labor shortages. However, AMN expects bill rates and clinician compensation to stabilize in 2023 above pre-pandemic levels.

In addition to its staffing business, AMN also offers technology and workforce solutions. Its language services business is experiencing increased utilization but also sees margin compression due to competitive pressures. Moreover, VMS revenue has declined along with the nurse and allied solution segment.

In a nutshell, the industry is experiencing a decline after rapid growth owing to the COVID-19 pandemic; however, over the long term, the industry is expected to grow after it adjusts to all the effects caused by the pandemic. I think sales in the following quarters will not fall as much as they did in 2Q23, as bill rates and clinician compensation peaked in the first quarter of 2022.

Risks

Covid-19 Bubble Burst

After a high demand for healthcare workers as a product of the pandemic, the industry is returning to a regular and sustainable growth trend; however, the excessive growth during 2021 and 2022 is reverting, causing the revenue of AMN to decline sharply along with earnings. I believe the company will start to grow again in 2025 after experiencing a steep decline in 2023 and a mild decline in 2024.

Competition

Even though AMN has an advantageous position relative to most of its competitors, there is always a risk that any other company surpasses it by innovating or by pricing lower. Even AMN has experienced price compressions in its technology and workforce solutions segment, wherein there was limited competition in the past; consequently, other staffing firms are trying to catch AMN.

Customer Bargaining Power

The healthcare provider industry has experienced a consolidation process, which has caused an increase in the bargaining power of some customers, such as Kauser, which in 2022 accounted for 18% of AMN’s revenue. If the consolidation process continues, the margins may be impacted.

Government Expense Reduction in Healthcare System

House and Senate plans to cut $8 billion in expenses in the American Healthcare System, as mandated under the Patient Protection and Affordable Care Act. Many hospitals are urging the government to avert or delay this cut, which is scheduled for October 1. In my opinion, this is a tough decision for the government as there is pressure to address the government deficit problem; however, depriving low-income Americans of healthcare services is an unpopular policy. Thus, it’s uncertain what will happen before October 1.

Valuation

According to analysts , the revenue is expected to decrease by -27.94% in 2023; I also expect revenue to continue falling in 2024 by -7%. However, I estimate the revenue will increase by around 5-7% annually for the following years. Moreover, the margins should decrease as the sales fall; however, a more significant portion of sales will come from the technology and workforce solutions segment. Given the risks, competitive advantages, and opportunities, I will use a discount rate of 15.75% and a perpetuity value of 15 P/FCF.

Conclusion

Based on my DCF analysis, AMN's stock fair value is $100 based on the abovementioned premises. I firmly believe these premises are conservative, so the probability of an even worse performance is low. However, I’m not convinced by the thin margin of safety. I would wait for a price of around $70-75 to be well-protected against the risks. Conversely, new acquisitions could take place and accelerate the growth rate in the future, which will increase the company's value as long as the funding sources are not so expensive (dilution costs or interest costs).

In a nutshell, AMN is a leading healthcare staffing company with a strong brand reputation, seamless operation efficiency, and a broad range of staffing services. These factors put AMN in an advantageous position in the industry, especially against small players. Additionally, AMN's VMS and AMN Passport create network effect barriers. Thus, AMN is well-positioned to benefit from the long-term secular trends driving demand for healthcare staffing. However, AMN is facing some challenges, such as the slowdown in demand for staffing services in 2023 and margin compression in its technology and workforce solutions segment. Additionally, AMN's worker satisfaction is lower than some of its competitors.

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