Credit markets overstate the risk for this healthcare staffing company
The pandemic proved to us how important the healthcare industry is and how understaffed we are.
It was obvious that the U.S. healthcare sector did not have enough staff, even before the pandemic.
This situation turns the lights onto healthcare staffing companies and among the most successful ones is AMN Healthcare Services (AMN).
However, credit rating agencies do not realize the booming demand for the company’s services and rate it with a high chance of default.
Let’s have a look at the company under the lens of Uniform Accounting and evaluate if it has a significant credit risk as rating agencies suggest.
We can use Uniform Accounting to put the company’s real profitability up against its obligations and decide for ourselves the true risk of this business.
Also below, a detailed Uniform Accounting tearsheet of the company.
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The U.S. healthcare system has been understaffed for so many years. Unfortunately, these types of issues come to light during bad times like the pandemic.
When COVID-19 hit the U.S., people understood how much we needed more healthcare professionals to deliver adequate care to citizens.
The gap between the demand and the current staff population is increasing year over year, worsening especially for registered nurses.
According to a study from the U.S. Department of Health & Human Services, we would need more than 3.6 million registered nurses by 2030 to meet the demand.
This means that we would need to add roughly 65,000 registered nurses each year on top of the existing workforce.
It is a huge problem for the healthcare system, as the shortage increases each day due to factors like employee burnout, an aging population, and a dearth of training.
While this issue is upsetting for our country, it is beneficial for healthcare staffing companies, particularly those that offer nurse staffing like AMN Healthcare Services.
The company makes 75% of its money from travel nurse staffing, rapid response nurse staffing, and labor disruption.
As demand for its services continuously increased, the company enjoyed massive profitability in the last two years. Its Uniform ROA skyrocketed to over 40% last year.
Yet, credit rating agencies like S&P seem like they are not taking into account this tailwind and are rating the company as a risky high-yield one.
We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand the company’s obligations matched against its cash and cash flows.
In the chart below, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).
The CCFP chart shows that AMN Healthcare Services’ cash and cash flow available are much above its obligations going forward.
The company’s operating obligations are tiny when compared to its cash and cash flows available.
Even its gross cash earnings alone are enough to cover all its obligations except for 2027 when its debt is maturing.
Still, the company could refinance this debt in the next 5 years or use its available cash without any worries.
Considering these factors and the necessity for its services, a BB rating that implies a 10% chance of default is too pessimistic for AMN Healthcare Services.
That is why we are giving an IG3 rating to the company, which implies approximately a 1% chance of default.
Thus, placing the company where it belongs, the investment grade classification instead of among the risky high-yield companies.
It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.
To see Credit Cash Flow Prime ratings for thousands of companies, click here to learn more about the various subscription options now available for the full Valens Database.
SUMMARY and AMN Healthcare Services (AMN:USA) Tearsheet
As the Uniform Accounting tearsheet for AMN Healthcare Services (AMN:USA) highlights, the Uniform P/E trades at 17.3x, which is below the global corporate average of 18.4x, but above its historical P/E of 16.2x.
Low P/Es require low EPS growth to sustain them. In the case of AMN Healthcare Services, the company has recently shown a 197% Uniform EPS growth.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, AMN Healthcare Services’ Wall Street analyst-driven forecast is for a 32% and -28% EPS growth in 2022 and 2023, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify AMN Healthcare Services’ $102 stock price. These are often referred to as market embedded expectations.
Furthermore, the company’s earning power in 2021 was 7x long-run corporate average. Moreover, cash flows and cash on hand are more than 5x its total obligations—including debt maturities and capex maintenance. The company also has an intrinsic credit risk that is 280bps above the risk-free rate.
Overall, this signals a moderate credit risk.
Lastly, AMN Healthcare Services’ Uniform earnings growth is above its peer averages and is trading in line with its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research