EUR 850.00 For Business Accounts Only

Morningstar | Profit Compression for AMN's Physician and Nurse Segments Cause for Concern

The overheated employment market seems to be catching up with AMN as a few key metrics and revenue guidance for the third quarter point to some forming headwinds. The firm reported continued struggles for its permanent physician staffing segment, which reported a 1.5% decrease in revenue and a 20-basis-point decrease 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 within the physician segment with quarterly revenue guidance that was below expectations for the second quarter in a row creates a major concern, from our perspective. With that said, we are reiterating our $22 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.

Unlike previous quarters, AMN was not able to offset lower gross margin with centralized costs reductions. Negatively, the firm’s gross and operating margins for its core nurse & allied segment compressed 150 basis points (to 26.3%) and 271 basis points (to 13.2%), respectively. Positively, the firm was able to moderately expand its bill/pay spread by 1% for this segment and we find this result impressive. However, this is the second of three quarters where bill/pay spread growth was below 2%. 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 top- and bottom-lines. Thus, our fair value estimate for AMN is based upon what we believe it can earn throughout a whole economic cycle.