AMN Healthcare Services: Limited Downside

Summary

  • AMN Healthcare Services has performed exceptionally well in recent years thanks to strong demand for its services.
  • This trend continues into the current fiscal year and shares look cheap on a forward basis.
  • Even if financial performance were to revert back to what it was in prior years, downside would probably be limited from here.
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Nurse at the hospital putting an IV Drip on a patient

andresr/E+ via Getty Images

Talent is one of the most valuable resources, if not the most valuable resource, that any enterprise can have. Because of this, it should come as no surprise that there are companies dedicated to providing services aimed at optimizing the workforce of other businesses and focused on simplifying the staffing process. One such example that has an emphasis on the health care industry is AMN Healthcare Services (NYSE:AMN). In recent years, management has done a great job growing the company's top and bottom lines. At present, on a forward basis, shares look to be quite cheap. But even in the worst case, which is a scenario where financial performance would revert back to what the company saw in 2021, shares are no worse off than being fairly valued. Because of this, I have decided to rate the business a soft 'buy', with the best outcome being attractive upside and the worst outcome being limited downside should the market turn against the business.

A play on talent optimization

According to the management team at AMN Healthcare Services, the enterprise focuses its efforts on a few key activities. At the top of the list, we have the company's nurse and allied solutions. Through this unit, the company offers a range of staffing services, including nurse staffing and allied staffing. Under the nurse staffing category, the company provides specialty recruitment and temporary assignment of nurses for medical facilities. Travel nurses, for instance, are recruited for the purpose of traveling to specific locations, including internationally, on assignments that can range from 8 weeks to 36 months. The company also specializes in the niche of crisis nursing where it can provide rapid response staffing services. Also under this category, the company provides services on a local or per diem basis where clients are provided local staffing across all nursing specialties on a short-term basis.

Under the allied staffing category, the company provides allied health professionals to acute care hospitals and other health care facilities like skilled nursing facilities, rehabilitation clinics, schools, and pharmacies. The business also provides revenue cycle solutions for activities like remote medical coding, clinical documentation improvement, case management, and more. Physician and advanced practice staffing and interim leadership staffing are also activities engaged in for this segment. This also includes executive search and academic leadership staffing services. Other services center around managed programs where the company manages all or a portion of a client's contingent staffing needs in exchange for a fee. Recruitment solutions, where the company recruits, hires, and onboards permanent clinical and non-clinical positions on a client's behalf, are also provided under this umbrella. In addition to all of this, the company also provides various technologies solutions like language interpretation, vendor management systems, scheduling, and staff planning technologies, credentialing services, and more.

All of these activities are divided between three key segments. The Nurse and Allied Solutions segment made up 75% of the company's revenue and 63.1% of its profits during the company's 2021 fiscal year. Next in line, we had the Physician and Leadership Solutions segment. This was considerably smaller, accounting for just 14.9% of revenue and for 11.2% of profits. And finally, we had the Technology and Workforce Solutions segment. In 2021, this unit was responsible for just 10.1% of the company's revenue. However, it accounted for 25.7% of the company's overall profits, making it the cash cow of the enterprise.

Historical Financials

Author - SEC EDGAR Data

Financial performance achieved by AMN Healthcare Services has been quite appealing in recent years. Between 2017 and 2020, revenue rose at a modest rate, climbing from $1.99 billion to $2.39 billion. Then, in 2021, revenue skyrocketed to $3.98 billion. This 66% rise, according to management, was largely driven by higher organic revenue across all three of the company's segments, combined with a further $23.4 million in added sales as a result of three different acquisitions. Considering the nature of the pandemic, it makes sense for the business to have flourished during this time. After all, the medical industry was ill-prepared for the pandemic.

On the bottom line, things have been a bit more volatile. Net income has bounced around in the four years ending in 2020, ranging from a low point of $70.7 million and a high point of $141.7 million. But then, in 2021, net profits jumped to $327.4 million. This makes sense when you consider the significant rise in organic revenue the company experienced. In short, it was able to charge more for its services given the high demand. Other profitability metrics have also been favorable. Between 2017 and 2020, operating cash flow expanded from $160.5 million to $256.8 million. Cash flow continued to grow in 2021 climbing to $305.4 million. Over that same window of time, EBITDA also improved, jumping from $259.8 million in 2020 to $581.7 million last year.

Historical Financials

Author - SEC EDGAR Data

Strength for the company has continued into the current fiscal year. Revenue in the first quarter of 2022 came in at $1.55 billion. This compares to the $885.9 million reported just one year earlier. This 75% increase year over year was, according to management, driven largely by stronger organic revenue across all three of the company's segments. Under the Nurse and Allied Solutions segment, revenue jumped by 87% as a result of a 41% increase in the average number of travelers on assignment, and due to a 35% increase in the average bill rate the company was able to charge. The Physician and Leadership Solutions segment reported a 28% rise in revenue, driven in large part by a 28% rise in the number of days filled for the company's locum tenens business. The company's interim leadership business saw revenue jump by 14%, while the physician permanent placement and executive search business grew by 46%. And finally, the Technology and Workforce Solutions segment reported a 64% rise in revenue as a result of stronger demand for technology solutions.

This rise in revenue also brought with it an increase in profitability for the company. Net income of $145.1 million dwarfed the $70.4 million reported just one year earlier. Operating cash flow rose at an even more impressive rate, soaring from $39.1 million to $200.2 million. Even if we adjust for changes in working capital, it would have risen from $109.4 million to $213.9 million. Meanwhile, EBITDA for the company also expanded, nearly doubling from $140.9 million to $257.6 million. Management has not provided any guidance for the current fiscal year. But if we annualize results experienced so far this year, we should anticipate operating cash flow of around $597.1 million and EBITDA of roughly $1.06 billion.

Trading Multiples

Author - SEC EDGAR Data

Taking this data, we can easily value the business. Using the 2022 estimates, the firm is trading at a price to operating cash flow multiple of 7.6. For the EV to EBITDA approach, the multiple comes in at 4.9. These are both incredibly low on an absolute basis. However, it would be a mistake to assume that current market conditions will persist in perpetuity. Even if we see financial performance revert back to 2021 levels, shares don't look all that pricey. Using the 2021 results, AMN Healthcare Services is trading at a price to operating cash flow multiple of 14.8 and at an EV to EBITDA multiple of 8.9. Even if financial results drop back to 2020 levels, the firm might be only marginally overpriced at best. That would be based on multiples of 17.6 and 19.9, respectively. To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 7.3 to a high of 15.7. Compared to the 2021 figures, three of the five companies were cheaper than AMN Healthcare Services. Using the EV to EBITDA approach, the range was from 5.5 to 15. In this case, two of the five companies were cheaper than our prospect.

Company Price / Operating Cash Flow EV / EBITDA
AMN Healthcare Services 14.8 8.9
Korn Ferry (KFY) 7.3 5.5
Robert Half International (RHI) 15.7 10.0
Kforce (KFRC) 15.6 12.0
ManpowerGroup (MAN) 8.0 6.7
Insperity (NSP) 11.6 15.0

Takeaway

Recent financial performance for AMN Healthcare Services has been incredibly appealing. Of course, we need to keep in mind that the past couple of years have been different than what you would expect in a traditional time. Even if we do see financial results revert back to what they were in prior years, it's difficult to imagine the company experiencing much downside. And in the best case, if business remains robust for the firm, then shares might experience a nice bit of upside moving forward. Because of this favorable risk-to-reward profile, I have decided to rate the business a soft 'buy' at this time.

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This article was written by

Daniel Jones profile picture
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Robust cash flow analyses of oil and gas companies

Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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