2023-07-28 04:00:00 ET
Summary
- RCM Technologies is a diversified talent services holding company operating in healthcare, life sciences and IT, and engineering segments.
- The company's Engineering business has built a backlog for 2023 that will materialize in future quarters.
- RCM Technologies has opportunities to expand its healthcare segment to other school systems and provide behavioral therapists to meet increasing demand.
The following segment was excerpted from this fund letter .
RCM Technologies ( RCMT )
RCM Technologies is a diversified talent services holding company. The company operates in three segments: healthcare, Life Sciences and Information Technology (LS&IT), and Engineering. The company has a strong history of high-quality capital allocation, including smart M&A and opportunistic share buybacks. Recent commentary from the Q1 earnings call suggests that their Engineering business has built a backlog for 2023 that will materialize in future quarters.
After their 4Q earnings back in March, they noted "Material Weaknesses in Internal Control Over Financial Reporting" which caused the stock to drop 30%. I spoke with their CFO, Kevin Miller, about this after they submitted the filing. Kevin noted that the material weakness identified was related to their use of a third-party consultant to assist with the creation and ongoing development of their SAP accounting system. This work allowed those third-party consultants access to their accounting system, which is what caused the auditors to note a Material Weakness in Internal Controls.
This came up during their most recent audit in 2022, and they are in the process of rectifying it in 2023, as they laid out in the 10-K. Currently, it is projected to be rectified in 2Q or 3Q of 2023. It seems highly unlikely that any material misstatements of their financials were made, and this material weakness should be resolved later this year with no impact on their financials.
Market Opportunity - Segments
RCM Technologies Healthcare segment is focused on providing nurses and other healthcare professionals with long-term and short-term staffing and placement services to hospitals, schools, and long-term care facilities. Since COVID, they have had success securing contracts with large school systems across the country in order to provide them with staffing for nurses, therapists, and other healthcare professionals at these schools. The Healthcare segment's revenues have more than doubled since 2020, driven largely by the school segment.
Recent weakness in their Healthcare business was driven by lapping some COVID-related demand spikes that are soon to be behind them. Overall, as COVID has become endemic, the school system's demand for nurses and therapists has slowed, but I believe we have stabilized around Q1 levels, as suggested by management in the Q1 conference call. There is a huge opportunity in this space to expand to other School systems around the county, as they currently only service a small number of larger school systems.
The total TAM of the school segment is likely 10-20x their current market share. On top of a large TAM in front of them, they have a huge opportunity to provide behavioral therapists to school systems, which are increasingly in demand by school systems to provide support to their students for behavioral and social issues. I believe we will see behavioral therapist demand outpace nurse demand in the future as more schools look to put in resources capable of supporting their students emotional health.
In the field of engineering, RCM Technologies offers a diverse range of services, including product design, development, and testing, as well as technical staffing and consulting. They assist clients in sectors such as aerospace, automotive, energy, manufacturing, and telecommunications. They have increasingly positioned their engineering business to be supportive of the shift to alternative energy. As new renewable energy resources and the shift to electric vehicles approach, there is a huge need for utilities to upgrade their transmission infrastructure.
RCM Technologies Engineering Group has expertise in supporting a wide array of energy projects in the generation and transmission segments, including projects in solar, biofuels, fuel cells, batteries, substations, and transition upgrades. The engineering segment is well positioned in North America. Outside of that, RCM Technologies has recently launched an engineering office in Germany, which could be a launching pad for developing a business in Europe.
With regard to the Life Sciences and Information Technology (LS&IT) segment, RCM Technologies offers IT staffing, consulting, project management services, and life sciences support to assist businesses in various technology-related initiatives. They provide skilled IT professionals who can support clients in areas such as software development, data management, cybersecurity, and infrastructure management. This segment focuses on providing a full suite of IT services to middle-market companies within various industries.
The LS&IT segment is the smallest of the three segments but has the highest gross margins at 34.5% (vs. 30% in Healthcare and 22% in Engineering). The segment has been an extremely reliable and consistent part of their business, generating roughly $3m / quarter of gross profit for RCM but growing only a few percent a year since 2020. In a way, you can think of the LS&IT segment as a cash cow that helps feed the faster-growing Healthcare and Engineering segments.
RCM Technologies - 4 Pillars of an Exceptional Investment:
Pillar | Rating | Comments |
Pillar 1 - High Quality Business Model | B- | • The healthcare segment has a very strong niche in providing schools with nurses, which differentiates their revenue streams, has sticky contracts, and is very early in its expansion. |
• The engineering segment is driven largely by the development of new projects in oil & gas, energy, manufacturing, and telecommunications. | ||
• Talent Services (specifically the life sciences and healthcare segments) are highly exposed to the US employment market, which is a key watch point for the company. | ||
Pillar 2 - Outstanding Management | A | • Executive Chairman Brad Vizi has shown an aptitude for capital allocation, including some M&A, well-timed buybacks, and well-timed debt usage and repayment. |
• Brad and the CFO, Kevin Miller, have developed a strategy in which they "skate to where the puck is going" within each of their business segments. | ||
Pillar 3 - Substantial Long Term Growth Prospects | B+ | • The Engineering and Healthcare segments are well positioned to take advantage of trends in each of their segments: Engineering: biofuels, expansion of the electricity grid, and renewable energy Healthcare: expanded penetration of clinical therapists in schools. |
• Due to the high cash flow of the core businesses, there is a lot of optionality for management to pursue M&A or share buybacks. | ||
• The company has several small initiatives that will start adding to its core revenues and earnings, including expanding its Engineering into Europe and their TalentHerder acquisition completed in October 2022. | ||
Pillar 4 - Reasonable Valuation | A- | • Company has bought back 11% of shares in last 12 months (as of end of 1Q) |
• EV/EBITDA = 6.7 TTM. The stock is up 68% in Q2 and still relatively cheap but less so than earlier this year. | ||
• Engineering services will be back half of 2023 loaded. I expect some solid 3Q & 4Q revenue and EBITDA growth. |
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Deep Sail Capital - RCM Technologies: 4 Pillars Of Exceptional Investment