EUR 850.00 For Business Accounts Only

Morningstar | AMN's Results Signal Cyclical Headwinds Are Forming

AMN Healthcare Services reported a decent third quarter, but its performance is clearly slowing. The overheated employment market seems to be catching up with the staffer as a few key metrics and revenue guidance for the fourth quarter point to some forming headwinds. The firm continues to struggle with its permanent physician staffing segment as this business reported a 9.3% decrease in revenue and a 170-basis-point compression in gross margin. Historically, higher-level and costlier staffing segments are a leading indicator for when an employment market is reaching its peak. Combining these headwinds in the permanent physician segment with quarterly revenue guidance that was below expectations for the third quarter in a row creates a major concern, from our perspective. With that said, we are reiterating our $26 fair value estimate for the narrow-moat player as we have already built in a total economic cycle into our model, including a downturn for the healthcare employment market.

AMN was not able to offset lower gross margins with centralized cost reductions. Its gross and operating margins for its core nurse and allied segments did both remain relatively flat but were well below the strong growth metrics posted during 2017. The firm also faced pressure on a per full-time employee basis as its bill/pay spread decreased 35 basis points. We find this result in line with a staffer reaching the tail end of a expansionary period. The slowing trend with this metric adds to our concern.

We continue to view AMN’s equity as overvalued, as its current stock price incorporates close to peak operating results flowing into perpetuity. We believe it is critical for investors to keep in mind that staffing is a highly cyclical business, and strong results are normal during an economic expansion. These trends reverse during recessions with significant retrenchment of both the top and bottom lines. Thus, our fair value estimate for AMN is based on what we believe the company can earn throughout a whole economic cycle.