October 07, 2022 - 9:18am EST by
2022 2023
Price: 31.00 EPS 4.79 1.60
Shares Out. (in M): 38 P/E 6.4 19.4
Market Cap (in $M): 1,177 P/FCF 0 0
Net Debt (in $M): 205 EBIT 265 90
TEV (in $M): 1,382 TEV/EBIT 5.2 15.3
Borrow Cost: General Collateral

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The nursing agencies have spent plenty of time over the past few quarters laying out their rational to why much higher temporary staffing levels and higher wages are sustainable. This was further discussed on CCRN’s recent analyst day on September 14th which has been followed by a strong reaction to stock price from the commentary and guidance for the remainder of 2022 and 2023.

“As a result, we believe bill rates will settle in roughly 35% higher than pre-COVID rates heading into 2023, which equates to an annual compound growth rate of about 8% relative to those pre-pandemic rates.”

-          William Burns, CFO at 9/14/22 CCRN Investor Day

“Now looking at this chart, the point we find most interesting is that when you calculate the average number of FTEs in the marketplace using bill rate trends, you see that the clinicians on assignment are expected to be up nearly 65% and likely higher with the new estimates relative to the pre-pandemic years, which represents a compound annual growth rate of about 13%. There are a number of factors that come into play for a clinician to decide to accept one of these contingent roles, which, of course, includes compensation, but it also includes the lifestyle and the freedom to choose when and where you want to work.”

-          William Burns, CFO at 9/14/22 CCRN Investor Day

“No, we believe that is a floor, that $2.2 billion in revenue and the $200 million in EBITDA.”

-          John Martins President, CEO & Director at 9/14/22 CCRN Investor Day

Despite this bullish commentary from CCRN, the hospitals are saying the exact opposite and give support that earnings will continue to decline well below $200 million of EBITDA projected as a floor by CCRN management. This report is going to focus on what is coming from the hospital side and why we believe the earnings aren’t remotely sustainable and why CCRN is the next COVID over-earner that will make a great short opportunity over the coming quarters.

There are likely four ways to win on this short: 1) Reduction in travel nurse volumes below street expectations, 2) Reduction in pay for travel nurses below street expectations, 3) Compression of take rates leading to lower margins, or 4) most likely some combination of 1 through 3.

Hiring and Retaining Staff:

Hiring and retaining staff has become a focal point of every major hospital system. This is a combination of purchasing nursing schools, increasing recruiting efforts, increasing pay, bonuses, and offering more flexibility. As the COVID surges continue to become less relevant to staffing, this will also make having the right number of nurses on staff much easier.

Furthermore, travel nursing is often most attractive to new grad nurses or ones later in their career that have much more flexibility. The increased pay was very enticing to take advantage of the poor conditions during the pandemic and as this mean reverts many travel nurses will look to gain more stability at a full-time position.

Reducing Costs of Contract Labor:

Given the massive difference between full time pay and contract labor, we would expect hospital systems to continue to increase these efforts and return contract labor costs to a similar amount as pre-COVID. For example, Tenet Healthcare had contract labor costs increase above 6% in 2022 vs. 2-3% in 2019. Similar scenario with Community Health Systems which had contract labor increase to as high as 13% of total labor costs vs. about 2% prior to the pandemic.

Travel nurses in many areas are still consistently making 4x or more the amount of a full-time employee in the hospital system. We would expect the market to rationalize and either have full-time pay continue to increase to incentivize more full-time employees, or more travel nurses to enter the market driving down contract rates.

Increased Competition:

When talking to industry contacts, the vast shortage of labor made many startups focused on healthcare staffing scale quickly. These start-ups are more technology focused and could quickly take share from larger players like AMN and CCRN. For example, Aya Healthcare has seen a lot of success and gained share. Other disruptors like Nomad Health, Vivian Health, or Trusted Health provide further competition from the agency side. Similarly, marketplaces like Wanderly will lead to more transparency from the agencies. We think increased competition and transparency will lead to lower take rates for players like CCRN and pressure margins over time.


So, what could earnings look like as these markets continue to normalize? Competition is a powerful force and as these hospital systems continue to focus on attracting and retaining talent you will see a decline in travel nurses and the corresponding pay. Furthermore, the overearning in the market has given new agency entrants much more resources and the ability to be able to compete and take share which could lead to a more fragmented market and ultimately compressed take rates.

This is a market that was largely stable for years. This is a true peak on peak scenario and the notion that EBITDA will go from averaging $37mm per year to $200mm+ is incredibly unlikely. See Pre-COVID financials for CCRN below.

Its difficult to know the exact outcome, but all the data supports much lower. Even assuming a material permanent uplift in EBITDA to $100mm, at 10x the stock would be worth $20 per share or nearly 40% downside.

If markets show to be even more fragmented and competitive and earnings revert closer to pre-COVID levels over time, at 10x $60mm of EBITDA the stock would be worth $10 per share or nearly 70% downside.

Relevant Quotes from Hospital Systems:

“…we have been, over the last year, working on solidifying nursing school relationships and other things to onboard new grads more effectively and create more rapid career paths for them. So that's really just about in every single hospital market, having a strategy to be able to source new grads along with what you point out, which is now trying to repatriate travelers back into the full-time environment. And that's an active and ongoing effort. I think there's no way to escape the fact that the next year to 1.5 years is going to require constant attention to the issue of placement of nurses in a way that helps us stabilize the workforce in the next period of time”

– Saumya Sutaria, CEO on THC Earnings Call May 25/22 Earnings Call

“We've also established our Tenet Resource Agency. Several years ago. It's grown significantly. We have several thousand nurses employed or through this agency. It rates admittedly higher than typical full-time employees, but still gives us a lot of flexibility to have resources available in various markets throughout the country, and it's been very successful.”

– Daniel Cancelmi, CFO on THC 5/25/22 Earnings Call.

“…I would use this as an opportunity to point out that our TRA, the internal Tenet Resource Agency that we run, has been a bit of a buffer to help create longer-term assignments, even within a traveling environment, to help with our own nurse staffing stability... So I think this is going to be an important agenda item for at least another year or 2 in really ensuring a high degree of execution in recruiting, in retention, in creating an environment for nurses where they can seek their career paths that they want and, at the same time, continuing to manage the contract labor rates down.

Saumya Sutaria, CEO on THC 7/22/22 Earnings Call

“…I think we have a view that as COVID volumes decline and we settle into sort of more of an endemic kind of an environment where there are not these extraordinary opportunities for nurses to chase premium dollars that are 4x or 5x their base salary that we'll see a bit more of a return to historic norms of nurses returning to full-time jobs, et cetera. I'm not suggesting that there have been no changes during the pandemic. I think we are probably going to get used to a higher level, a higher normative level of temporary and traveling nurses maybe than we've had in the past, et cetera. But I do think those numbers will continue to come down from where they are today to something approaching what we were used to in a pre-pandemic environment.”

Steve Filton, CFO on UHS 7/26/22 Earnings Call

“Yes, Peter, this is Bill. Let me start first with the contract labor. I think as we discussed last quarter, it was at a peak high in the first quarter really due to the COVID services, and we anticipated to be able to see sequential improvement. And indeed, that's what we saw. We thought it would first start with being able to modify the rates that we were seeing in the market in terms of the average early rate. And indeed, we saw that and we were able to execute on that as the quarter went through. We finished with June at rates we were anticipating when we reset our guidance after quarter. And I think over the course of the year, we'll continue to see hopefully a reduction in the utilization of that contract labor. And again, we were encouraged by the sequential improvement we saw. We're encouraged by kind of how we ended the quarter in the month of June. So it's pretty much in line with what we anticipated.”

- William B. Rutherford Executive VP & CFO on HCA 7/22/22 Earnings Call

“We see the market for labor moderating some and normalizing our turnover. As I mentioned, is down over 20% in the second quarter as compared to the first quarter. Our hiring and our recruitment function, which has done a wonderful job, it's up 18% in the second quarter as compared to the first quarter. So these metrics early successes, if you will, give us some promise that the combination of our compensation strategies, our retention strategy and then the mix of our labor workforce should improve as we move through the balance of the year.”

 – Samuel Hazen, CEO & Director on HCA 7/22/22 Earnings Call

“I think the acquisition of Galen has yielded since we closed on that transaction. We've added 8 new schools. And in most circumstances, those schools have started with an enrollment that was ahead of our model… We are up to 13 schools. We will open, like I said, a couple more this year. And I think our pipeline has 6 to 8 over the following 12 to 18 months. Our vision is that all of our major communities will have at least 1 Galen College of Nursing as part of the overall network offering. Some communities because of their size, will probably have more than 1….and we think its supply for HCA facilities that's unique in most circumstances.”

 – Samuel Hazen, CEO & Director on HCA 7/22/22 Earnings Call

“We responded to the challenging labor market conditions for skilled clinical resources in a number of ways, including adding substantial resources to our talent acquisition team. We have built a centralized recruitment function now comprising over 60 professionals. This strategy is gaining headway. Same-store net new RN hires were 276 for the first half of 2022 as compared to 117 in the same period last year. For the second half of 2022, we expect sign-on and shift bonuses to remain elevated as we continue to hire more RNs and use existing staff to fill in gaps. This will facilitate a decrease in our utilization of contract labor. Assuming normalizing industry conditions, we expect agency rates to decline further. However, the pace of the decline remains uncertain as agency rates remain highly variable, and the extension of the public health emergency may prolong the duration of elevated rates.”

-          Mark J. Tarr CEO, President & Director on Encompass Health 8/2/22 Earnings Call

“Shifting to labor. We remain focused on our plans to retain our workforce, recruit new clinical employees, and reduce contract labor. The number of nursing hires increased by more than 30% compared to the first quarter and our turnover rate declined 20%. These are clearly favorable trends as we work to reduce contract labor and create sufficient permanent staffing for key services and market share gains as healthcare demand strengthens. Contract labor expense declined each month of the second quarter, and we finished June with 30% fewer contract labor FTE compared to the end of March. Still contract labor remains at very elevated levels versus prior year, without the higher acuity inpatient revenues previously seen in the COVID pandemic, which partially offset its EBITDA impact. Already rates for contract labor are going down, and we continue to aggressively execute our recruitment and retention initiatives to build and strengthen a stronger core workforce. Through these efforts, we expect sequential quarterly improvement as the year goes on.”

- Tim L. Hingtgen CEO & Director on 7/28/22 Community Health Systems Earnings Call

“Second, rebuilding our workforce. As everyone knows, the COVID pandemic created seismic shifts across the industry, affecting staff recruitment, compensation and retention. But as I mentioned earlier, we are now seeing sequential improvement that we expect to continue, including progress in new hire rates and retention rates. Our centralized nurse recruitment program supports all of our markets and is achieving solid results. And we have enhanced our benefits program to provide more tuition reimbursement and loan repayment options, which has received positive feedback from employees. Our work to provide nursing education opportunities and to develop the next generation of nurses continues through our partnership with Jersey College. 4 campuses are fully operational, another will open in the third quarter and 6 more by the end of 2023. Across these programs, we expect to graduate 1,000 new nurses per year.”

- Tim L. Hingtgen CEO & Director on 7/28/22 Community Health Systems Earnings Call

 “Yes, Ben, this is Tim. I'll add on to that. In terms of turnover, as I mentioned, we are showing a sequential improvement in our retention rate and in our hire rates than we measure everything here daily by a net RN gain...In terms of the retention rate or the nursing turnover rate, still elevated to pre-pandemic levels, but we've cut it about half from the peak at the beginning or at the end of last year when we saw more staff leaving for travel assignments and frankly, for burnout purposes. I mentioned on the last call that we were really focused on repatriating nurses, who left in 2021 and frankly, throughout 2022. We've had some success with that. I don't think we're done with that work yet. I think once children get back in school, we may be able to bring some of those people back into the workforce again. So we're really focused on keeping those relationships tight with our care team members, who may have left the organization previously in the pandemic.”

- Tim L. Hingtgen CEO & Director on 7/28/22 Community Health Systems Earnings Call


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- continued efforts by hospitals to reduce contract labor

- less impact from COVID waves

- nurses returning to full time roles

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