Description

Overview
AMN Healthcare, the largest player in the traveling nurse industry, is an interesting play on the nursing shortage. The company recruits and places nurses in travel assignments at acute care facilities across the country. Each assignment typically lasts for 13 weeks. The company has continued to add services to include allied healthcare professionals to their thousands of client facilities nationwide, but nurses continue to represent over 90% of travelers. AMN’s six travel healthcare staffing companies are American Mobile Healthcare, Medical Express, Preferred Healthcare Staffing, Nurses Rx, Healthcare Resource Management Corporation (HRMC) and O'Grady-Peyton International. AMN has filled traveler assignments in more than 2,800 healthcare facilities in all 50 states.

The company should benefit from the continued nursing shortage. According to the American Hospital Association, there were about 126,000 registered nurse vacancies in the United States last year (about 10% of total positions). Projections show this shortage could increase to up to 20% of total positions by 2020 based on increased demand for medical services and the aging of the current nurse pools.

Key demand drivers for travel nursing include hospitals with predictable fluctuating census counts (i.e., snow birds heading to FL, AZ), maternity leave, and the general nursing shortage. As hospitals strive to keep the facilities fully staffed, travel nursing has emerged as a viable alternative for them. Hospitals are happy because they are able to keep their units staffed and opened; nurses are attracted to the option because it provides them an opportunity to explore a new part of the nation and generally offers higher pay. While hospitals would certainly prefer to pay less for their nursing needs, they need certain staffing levels to keep their facilities open.

The biggest constraint for the industry over the past few years has been recruiting candidates, where AMN’s leading position offers an edge over the competition. Referrals tend to be the biggest source of finding new traveling nurses. With over 7,300 employees, AMN is best positioned to keep expanding its candidate pool. To maintain a broad recruiting reach, the company has maintained the name of companies it has acquired. While each operates separately on the recruiting side of the business, the company provides one face – AMN Healthcare – to the hospital buyers.


Competition
The company is the largest player in the traveling nurse business, with about 40% market share. Publicly traded Cross Country (CCRN) holds about 30% of the market. Other players, including Medical Staffing Network (MRN) – primarily a per-diem nurse staffing company – hold the rest of the market. Given the high nursing demand, competition has primarily been based on who can provide satisfactory nursing candidates.

Cross Country has been aggressively expanding its recruiting force over the year, so far with limited success. This is not really surprising, as it takes some time for new recruiters to come up to speed. As these recruiters season, the company could pose more of a threat to AHS.

In addition to direct competitors, substitution poses a threat to these companies. Hospitals can try to squeeze more work out of their nurses by imposing overtime or reducing staffing levels. State laws and the human constraints on what nurses can do put some constraints on how far hospitals can utilize these strategies. Hospitals can also use per-diem nursing services, which provide less commitment and can have lower costs. The problem with this solution is that there often simply aren’t enough available nurses to fill demand.


Balance Sheet/Cash Flow
AMN has dramatically improved its financial profile since going public. The company used the proceeds from its 2001 IPO to pay off all of its debt. In addition to cleaning up the balance sheet, this action boosted earnings by dramatically reducing 2002 interest expense.

While momentum investors were attracted to the company’s hyper-growth, the enormous working capital required to fund that growth (AMN has to fund receivables) caused only nominal cash flow from operations in between 1999-2001: -$9.5MM, -$1.6MM, 1.7MM, respectively. Capital expenditures ranged from $1.7MM-4.5MM during those three years and acquisitions further reduced free cash flow.

Now that growth is slowing down to more sustainable rates, AMN’s cash flow is looking much healthier. The company has dramatically increased income and receivables growth isn’t eating up all of the cash flow. In the first nine months of 2002, the company generated cash from operations of $47.8MM (compared to $10.4MM in the prior year). Capital expenditures were $3.3MM and $9.5MM was used for acquisitions, resulting in free cash flow of about $35MM for the first nine months of 2002. Cash and equivalents have increased from $31MM at the end of 2001 to $70MM as of September 30th.

AMN’s improved ability to generate cash, combined with the company’s attractive valuation, led to the board to announce a $100MM stock buyback on November 12th. Management has indicated they are purchasing shares under this authority.


Comparables
AMN is slightly more expensive than primary competitor Cross Country based on its 2002 and 2003 P/E. This valuation premium is more than justified by AMN’s leading position, cleaner balance sheet, and more tenured management team.

Importantly, AMN also seems to be doing a better job in executing its business plan. Cross Country’s 2003 earnings estimates are currently $1.26/share, down from the $1.27 expected in January ’02 and the peak estimate of $1.33 in June ’02. My understanding is that the company is having trouble with productivity from its expanded sales force. On the other hand, AMN’s 2003 estimate of $1.36/share is down from $1.39 in October, but up from $1.13 in January ’02.


2002(E) P/E 2003(E) P/E Debt/Cap
AMN Healthcare 13.7x 11.2x 0%
Cross Country 12.6x 10.2x 11%
Medical Staffing Net. 20.7x 15.7x 29%


Major shareholder
A 10 million share secondary offering was completed in May 2002, but Haas, Wheat & Partners still controls about 43% of the company’s stock.


Management
AMN’s management has been fairly stable. Steven Francis, the President and CEO, was a co-founder of AMN Healthcare, Inc. He has been an executive officer and director since 1985 and President and Chief Executive Officer since June 1990. Prior to 1985, Mr. Francis served in several management positions in the hospitality industry.

Susan Nowakowski, the COO, joined AMN in 1990 and has been Chief Operating Officer since December 2000. She was CFO from 1990-1993 and worked on business development from 1993-2000.

The SVP of Nursing and Traveler Services and SVP of recruiting have been with the company since 1989 and 1988, respectively.

Don Myll, the CFO, is the only newcomer. He joined AMN in May 2001, having most recently served as CFO of Daou Systems. Prior experience include seven years as EVP and CFO of TheraTx, Inc. from 1990-1997.


What happened to the stocks
The three major nurse staffing stocks came public in the past 15 months as exciting growth opportunities. With pricing increasing 15%+, enormous internal growth, acquisitions, and regularly rising earnings estimates, the momentum guys had a field day. Then reality hit.

While price increases are still projected to be solid, they are likely to be 5% or so next year instead of the mid-teens. Most of the big acquisitions have been completed, so investors will have to settle for mid-single to mid-teens percentage internal growth in the number of travelers rather than the 20%+ growth from acquisitions and internal growth. The growth investor’s response is certainly to run far, far away.

Since these companies are all pretty new to the public investing marketplace, there weren’t many investors waiting to buy the shares that the momentum guys have been barfing up. Making matters worse is the fact that healthcare hasn’t been an area where investors have been buying over the past few months.


The opportunity
AMN should be a beneficiary of more investors learning about the traveling nurse industry. When people start screening on reported 2002 results, they will find a stock with an attractive P/E, solid operating and free cash flow, excellent growth opportunities, and large share repurchases. As they dig further into the story, they will find an industry that has good growth prospects and a company that is the industry leader with tenured management team. Certainly, a return of interest into the healthcare sector would also be a plus for the company.

At a price/earnings ratio of 14x current ’02 estimates, the company seems reasonably attractive if it could sustain earnings growth of 10% and outright cheap if it could expand earnings at a 15%+. Assuming satisfactory execution, the fundamentals of the industry seem in place for at least the lower number and a decent shot at 15%+.

(At a JP Morgan conference in late November, management indicated that they were still comfortable with projections of 13%-17% internal growth and 5%-6% pricing growth in 2003. That would provide revenue growth of 18%-24%. Assuming that the high demand for nurses keeps AMN prices at a level that covers employee and insurance cost inflation, margins should at least be flat with decent internal growth.)

Catalyst

• Establishment of a core investor base in this newly-public industry niche, who focus on AHS’ leading position, clean balance sheet, and solid cash flow
• Continued solid revenue and earnings gains (10%-20%+ instead of previously hoped for 25%+)
• Increased interest in healthcare stocks
• Benefits of $100MM stock buyback (about 23% of public float, 14% of total float at current prices)