By Vishnu Lekraj
When the supply of a commodity is constrained and demand is increasing, a supplier usually reaps the rewards. This is the case for AMN Healthcare (AHS), as long-term demand trends and an insufficient supply of health-care workers should form a solid foundation for the health-care staffer. We believe market participants are missing these long-term trends and are mispricing the firm's equity value.
Lower patient admission rates at medical facilities, light staffing turnover for the firm's clients, and uncertainty related to the future composition of the health-care industry have plagued AMN since the beginning of the most recent recession, and we believed these trends would turn earlier than they have. This dynamic has kept AMN's stock at a depressed level through most of the last calendar year. Nevertheless, health-care employment growth began to accelerate in the fourth quarter of 2011. As such, our expectation of growing patient admission rates though most of 2012 should be a catalyst for stock price appreciation, and we believe investors will be rewarded long term with major positive secular trends related to the staffing and health-care industries. In addition, the firm's resources of quality open positions and an inventory of capable health-care workers make it one of the go-to players for many health-care industry stakeholders.
Looking Good in the Long Term
AMN's current share price just north of $6 assumes a poor growth scenario into perpetuity. With the strong growth fundamentals inherent to the health-care industry, this scenario is highly unlikely, in our opinion. We expect the health-care industry to grow faster than any other economic sector for the foreseeable future. Therefore, we also expect the need for health-care workers to increase at a robust clip. This dynamic is especially true for nursing occupations, the core of AMN's business. According to the Bureau of Labor Statistics, health-care-related occupations are expected to experience the most total employment growth between 2010 and 2020--led by nursing services, which is expected to grow during this time frame at a 26% clip, or an addition of more than 700,000 jobs.
In addition to the growth in nursing worker demand, the Department of Health and Human Services, the American Association of Colleges of Nursing, and the American Medical Association expect a material nursing shortage to develop in the near term. According to our analysis, the cumulative gap between new nurse demand and graduating nurse resources will increase during the next several years; by 2020, the number of qualified nurses is projected to lag the number of available jobs by a few hundred thousand. We base our analysis on currently enrolled nursing students (data obtained from the American Association of Colleges of Nursing), our expectations for graduation rates, and the Bureau of Labor Statistics' job growth projections averaged over 10 years. And we believe our estimate is conservative as it does not include natural worker attrition. The confluence of positive industry dynamics and AMN's solid competitive position leads to our fair value estimate of $13 per share.
A Fundamentally Strong Staffer
The employment services sector includes many firms with different business models. All are mainly driven by the global employment market, but not all employment-related firms provide the same services. We believe there are four distinct subcategories of employment services companies: payroll processing [Paychex (PAYX), Automatic Data Processing (ADP)], uniform and facilities services
[Cintas (CTAS), G&K Services (GKSR)], Internet job boards [Monster Worldwide (MWW), Dice Holdings (DHX)], and temporary and permanent staffing [Manpower (MAN), Robert Half (RHI), AMN Healthcare].
AMN falls into the last category, which means clients partner with the firm to fill many of their open positions. In other words, AMN is not a job board; it has expertise placing competent personnel at client facilities and finding desirable positions for its workers. This makes it a preferred partner.
Additionally, most workers placed by the firm are employees of AMN and not the client. Even though temporary and permanent staffing firms are notorious for extreme cyclicality, we believe the higher-quality names will outperform the rest over the long term. Staffing is a harsh business, with a boom-and-bust cycle that can rival any economic bubble. Attaining a moat is tough, competition is fierce, and very few advantages can be developed.
That said, a staffing firm can achieve a narrow economic moat, the key to which is the ability to build a solid employment network (the combination of jobs/job seekers and office network optimization); we believe successful staffing firms can build an optimal network by having a strong niche expertise in a particular sector of the labor market. This dynamic builds an identity with customers and workers of a particular industry. In addition, capital is used efficiently through this business model as recruiters, offices, and other assets can leverage the synergies of a one-industry strategy. Of the nine staffing firms we cover, we believe only six have a premier employment network: AMN, Robert Half, Trueblue (TBI), Manpower, Resources Global (RECN), and Insperity (NSP).
We believe AMN has the expertise to competently fill many health-care positions more efficiently and effectively than its clients' own human resources departments. This ability has allowed the firm to produce outsize returns on invested capital over an extended period. While there may be a misconception that the firm is no better than a job board player, the positive fundamentals of its health-care staffing business model give it solid advantages, in our opinion.
Lower patient admission rates at medical facilities, light health-care worker turnover, and uncertainty related to the future composition of the health-care industry have been AMN Healthcare's main antagonists during the last few years. These factors have caused the firm's revenue, profits, and stock price to decrease immensely. The firm's operating environment improved during 2011, but the pace of this recovery disappointed many market participants. That said, there was a noticeable increase in hospital employment over the fourth quarter of 2011, and this trend should provide a solid base for the health-care staffing sector in 2012.
While AMN Healthcare has faced a rough time during the last few years, we strongly believe robust demand for health-care services and an insufficient supply of health-care workers should provide a strong catalyst for solid top- and bottom-line growth in the long term. However, stock market participants have been focused heavily on near-term obstacles as AMN's clients have been cautious to expand their medical workforces, given a confluence of factors. We expect these negative trends to reverse in 2012 as the economy recovers, patient admission rates increase, and positive secular variables begin to take hold.
We believe the future is bright for AMN Healthcare. In fact, we believe strong secular tailwinds, a narrow economic moat, and an attractive valuation make AMN the best opportunity among employment services firms today.
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