AMN Healthcare (AMN)
Thesis
AMN is a healthcare staffing provider that experienced an incredible spike in demand during COVID (approximately 2020 through early 2023). Following the end of the acute phase of the pandemic, the company is currently struggling through a difficult normalization period.
However, there is growing evidence to suggest a trough in both demand and margins is forming.
Assuming the early signs of price stability hold and that volumes- already well below 2019 levels- continue to decline in 2025, bottom in 2026, and see minimal expansion the following year. In 2027, AMN could produce $340M of EBITDA, $4.70 of FCF per share, and be at the bottom end of its 2x to 2.5x leverage target- nicely positioning the company to begin returning cash to shareholders.
At 8x EBITDA (approximately a turn less than it has traded historically), AMN is a $50+ stock, with a high-20%s three-year IRR, and considerable room to grow the topline at a mid to high single digit (M/HSD) while expanding into more stable, higher margin businesses.
Travelers: “Nurse and Allied Staffing” (N&A)
Healthcare providers (hospitals, nursing facilities, ambulatory centers, etc.) use AMN to temporarily hire nurses and other non-MD medical professionals (various types of therapists, radio/lab techs, pharmacists, etc., collectively “allied staff”) to fill gaps in full-time staffing. Contracts are typically 13 weeks, with the healthcare workers frequently traveling to and living near the provider’s location (e.g., a nurse from Dallas moves to Cleveland on assignment).
AMN bills the provider an hourly rate and, in turn, manages the logistics around the healthcare worker’s placement, payment, insurance, and living stipends (e.g., housing).
The N&A segment (~65% of sales, ~50% of EBITDA) is largely a function of three variables: bill rates, orders from providers, and fill rates (how many orders are fulfilled), with the latter two determining travelers on assignment (TOA).
Bill Rates: COVID-driven demand for healthcare labor sent bill rates parabolic. AMN’s implied rate shows a doubling versus 2019, though a brief skim of travel nursing Facebook groups and other forums shows many were making multiples of their pre-pandemic salaries. After cresting in early 2022, rates subsequently fell and are now in line with broader wage inflation since 2019.
Rates saw a slight sequential increase from Q2 to Q3 and management commentary points to stabilization, with some clients even raising rates (a “significant change” from a relentless downward trend). Staffing competitor Cross Country Healthcare (CCRN) echoed the flatlining of bill rates and guided to a “modest improvement” in Q4.
On the customer side, providers have signaled that contract labor expenses have returned to their pre-COVID levels. While recent provider initiatives such as building internal traveler programs (nurses travel within a single hospital system) and developing talent pipelines with in-house nursing schools (e.g., HCA’s Galen) may put further downward pressure on the “new normal” of contract staffing spend, the major hospitals seem comfortable with their current expenditures:
HCA VP of IR, UBS Conference (11/14/24)
“We are running about 4.5% of our SWB is contract labor, and we think that's a pretty good number for the company as well in terms of where we hope to run at least the rest of the year and continue hopeful stability into '25.”
Community Health Systems (CYH) CFO, UBS Conference (11/12/24)
“(We’re) getting very close to approaching a pre-pandemic level of contract staffing. The cost is still a little bit higher than it was pre-pandemic… not surprising. I think that we'll be able to continue to make a little more progress on that, but approaching the very stable range of (what) we would expect.”
Tenet Healthcare (THC) CFO, Wells Fargo Conference (9/4/24)
“We're at a very stable position. Base wages (including contract wages are) probably still not back to pre-COVID levels, but pretty close… rates are now at which we can manage them, we can drive profitability.”
Universal Health Services (UHS) CFO, Q3 earnings (10/25/24)
“Our use of premium pay (contract labor) has diminished dramatically, although it is starting to stabilize and flatten out, and I think that should continue.”
Bill rates appear to have found a bottom. Though they may fluctuate over the next few quarters, an upward move seems more likely than a further protracted decline.
Orders: As patient volumes fell from the COVID highs, so did the need for contract labor. Aya Healthcare’s (another staffing peer) industry benchmark job volume index shows the incredible correction in open nursing roles (a proxy for provider orders):
However, on their respective Q3 calls in early November, both AMN and CCRN pointed to a strong increase (up to 60%) in requests for staffing since the April nadir. Notably, orders are still 35% lower than 2019 levels, indicating that- even if the previously discussed, in-house structural changes prove material- the order recovery may reasonably persist.
Fill Rates: As bill rates fell, clinician compensation expectations generally lagged the shifting reality. Though most orders were still filled due to a combination of travel nurse oversupply and staffing companies’ willingness to concede margin (those forgone dollars allocated to the healthcare professionals) to win business (N&A segment gross margins were ~28% pre-COVID and are shaping up to be ~24% for FY 2024).
This dynamic appears to be reaching its limit. AMN reported unfilled orders increased from 9% in Q2 to 14% in Q3.
AMN’s CEO explains (11/7/24):
“(Healthcare workers) are increasingly not filling orders priced at levels that don't make economic sense (and do not pay) in line with broader wage and housing inflation… bill rates in the fourth quarter of 2024 have reached the low end of the 15% to 20% premium they maintained over the cost of permanent nurses prior to 2020, which could help explain the increase in unfilled orders in the industry.”
The imbalance is unlikely to last. CCRN’s CEO outlined the supply-demand convergence on the Q3 call (11/6/24):
“We're getting more orders, (but) over 50% are not at the market bill rate… it is an encouraging sign as what we've seen before is… once the orders step up- even though bill rates aren't at market rates- eventually the bill rates step up or the clinician's expectation will go down a little bit. We anticipate an inflection point (where) the acceptable pay rate (to) the clinician and the bill rate come together over the next, say, one or two months.”
Nearly 70% of N&A segment revenue flows through one of AMN’s Managed Service Programs (MSP)- an arrangement in which AMN handles a provider’s contingent staffing needs. The company will usually try to fill orders with their own pool (“internal”) of contract nurses first (and capture the full bill rate economics) before turning to third parties. During COVID when available labor was scarce, internal fill rates plummeted (the below chart implies about a 10 point drop, an AMN former claims as much as 40 points) as AMN leaned heavily on external vendors to meet demand.
The company’s current internal fill rate is roughly 30%- five points below pre-COVID levels, and less than half on a dollar spend basis (again, based on the chart). Assuming these figures are illustrative, yet instructive: the apparent latent capacity coupled with AMN’s substantial technology spend offers upside as the pairing better enables the company to fill the marginal order- possibly taking share from vendor neutral options and growing segment topline faster than total MSP spend growth.
Rising unfilled orders along with growing staffing demand ultimately puts upward pressure on bill rates. As the offered wage becomes agreeable to a wider swath of healthcare professionals, fill rates should increase. Higher fill rates on a larger order base drive travelers on assignment. More travelers at greater bill rates boost N&A segment revenue. This recovery also allows for gross margin expansion as AMN can amortize fixed costs over a larger revenue stream and no longer must compensate for low bill rates by ceding (as much) margin to healthcare professionals.
The Other Businesses
Physician & Leadership Solutions (P&L): P&L primary provides temporary staffing services for physicians (“locum tenens”). The key underlying factors (falling bill rates, mismatch between clinician expectations and provider offers, etc.)- and thus core recovery thesis- are very similar to N&A’s.
Because physicians are more closely linked to revenue generation for providers (e.g., charge for a diagnosis that then leads to a billable treatment procedure), the locum tenens business has been more resilient to the whiplash in bill rates and demand*, and is better situated to resume growth.
*This is admittedly an educated guess and obfuscated by the $293M Q4 ’23 acquisition of locum tenens provider, MSDR. However, the intermittently disclosed organic growth rates are far less volatile than N&A’s.
Technology & Workforce Solutions (T&WS): AMN’s tech-enabled segment has several products with the two largest being Language Services (translation and interpretation) and its Vendor Management System (“VMS”, a SaaS solution for providers or MSPs to handle staffing planning and logistics). Language services is expected to continue to grow at a double digit rate and VMS tracks staffing volume. Combined, these services produce 40%+ segment EBITDA margins (pushing company-wide margins to low double digits+*) and a more stable source of cash that is less subject to the whims of provider demand**.
Investment in T&WS has been a major reason for increased capex since 2021. Management claims most tech projects are completed and that this spend will step down in 2025.
Along with the projected cash savings, T&WS growing faster than the rest of the AMN business should slowly push the company towards higher quality (i.e., a more stable, subscription-rooted source) revenue while lifting margins (even if company-wide levels are reduced for some time as clinician demand normalizes). However, segment margins are likely to be depressed in the near/intermediate term as comparably lower margin Language Services (40% gross) growth outpaces VMS’ with its ~90% SaaS margins.
*Contrast with peer CCRN- which lacks a sizable VMS business- at ~4% EBITDA margins.
**VMS income is a take rate fee on total spend that flows through the platform. So long as a provider or other staffing agency uses the VMS- even outside an AMN MSP or not involving AMN contracted healthcare professionals- AMN gets a cut.
The Cross Country Healthcare Acquisition
In early December, Aya Healthcare agreed to acquire CCRN for approximately 11x EBITDA and a 67% premium to the prior day’s close (it had been trading for around 6x EBITDA). CCRN is half the size of AMN and lacks much of the high margin tech offerings but is net cash and complimentary to Aya’s already tech-forward business.
The deal demonstrates that there is a (live!) bid for these types of assets. There is also a history of PE involvement (Leonard Green has owned staffing firm CHG Healthcare for over a decade). Any buyer would have to contend with AMN’s 3x+ of net leverage, but in turn, receive a more diversified business that is poised for a recovery/upcycle.
For context, a 10x bid on consensus 2025 EBITDA would be a 30% premium.
Valuation
Topline falls low single digits (LSD) in 2025 as bill rates stabilize and traveler volumes decline mid-single digits (MSD). Bill rates grow along with broader wage inflation, but volumes do not see an (LSD) uptick until 2027- ending 10% below pre-COVID levels. P&L is a very-LSD grower, Language services decelerates from low teens to MSD, and VMS recovers alongside volumes at a 10% clip.
Company-wide revenue grows at a (accelerating) LSD+ pace through 2027. Organic growth normalizes at a LSD to MSD rate. Tuck-in acquisitions could bump this to HSD.
N&A gross margins continue to contract on lower volumes, then stage a modest recovery in the out years. T&WS see a temporary compression as mix shifts toward lower margin Language Services before expanding as VMS grows in tandem with volumes. 2027 consolidated gross margins end in-line with pre-COVID figures- with opportunity to further widen through improved fill rates and greater TW&S penetration.
Each segment experiences some de-leveraging then re-leveraging of operational expenses. Corporate expenses grow on a dollar basis, though partially revert to their common-size historical levels. Despite a structurally higher gross margin business, 2027 firm-wide EBITDA margins are still 150 bps below pre-pandemic levels- additional savings and efficiencies can likely be found, increasing terminal margins.
Capex step down and interest savings through financial deleveraging/low rates improve FCF conversion. Slow grow does not entail the huge working capital swings experienced during COVID and the corresponding need to draw on the revolver to make payroll. By 2027, AMN could generate $185M of FCF (a sub-6x multiple) and, by that point well within its target leverage range, begin repurchasing shares.
An 8x multiple on $340M of EBITDA nets a $53 share price for a nearly 30% IRR.
Bottom Line: AMN has seen a difficult adjustment period following the COVID peak. However, a trough appears increasingly evident, and the company is well positioned to benefit from secular healthcare demand tailwinds. As volumes recover, AMN should be able to expand firm-wide margins both through improvements in its core staffing business and growth of its technology services.
Combined with deleveraging, better cash generation, and (perhaps) an implied “PE put”, AMN- though an unglamorous business- is an attractive investment opportunity.
Risks
As there has yet to be a definitive inflection in bill rates, volumes, fill rates, etc., AMN remains somewhat of a falling knife (though the stock itself is up ~10% from its December lows- hinting that tax loss selling might have exacerbated the latter part of the drawdown). Competition from providers’ far more robust internal staffing pools and in-house nursing schools might reset the “new normal” demand for contract labor to be materially below 2019’s. The Aya/CCRN tie up may also introduce damaging competitive pressures or trigger an arms race in tech spending- keeping capex elevated.
Finally, this a 3x+ net levered small cap: any signs of the above or further deterioration in KPIs will be amplified by the financial leverage and likely result in an outsized stock price move.
