Takeaway: We added AMN to Investing Ideas on the long side on 2/8.

Stock Report: AMN Healthcare Services (AMN) - AMN Table

THE HEDGEYE EDGE

Trends in hospital employment, registered nurse unemployment, and wage inflation, among other data series, suggest we are in the midst of a late cycle acceleration in medical consumption. 

One of the more obvious ways to play this theme is through AMN Healthcare (AMN), the temporary nurse staffing company.  The U.S. Medical Economy has fully transitioned through the distortions created by the ACA, including the surge in insured medical consumers, followed by the subsequent #ACATaper that appears to have bottomed in 2017.

One of the key themes we’ve identified in Health Care is accelerating wage inflation for medical workers. This creates an interesting set up in 2019 where incrementally positive patient volume could be offset by an extremely tight health care labor market, especially for RNs.  For a temporary health care staffing company like AMN, the result should be decidedly positive. 

We’re already seeing this dynamic show up in current Health Care employment trends. Health Care employment accelerated to 2.3% from 2.2% month over month in January 2019 following a 20% increase in JOLTS - Openings, which typically leads hiring by 6 months. Wages and payrolls appear to be responding positively as well with December average hourly earnings of production and non-supervisory employees rising 3.2% vs 1.7% a year ago.  

Stock Report: AMN Healthcare Services (AMN) - hcemp

There continues to be a good long thesis with AMN despite the disappointing 4Q18 results and 1Q19 guidance.  We'd be more concerned if the market dynamics were not as strong as they are; health care wage growth is accelerating, health care hiring and job openings are accelerating, and our model continuing to forecast improvement in utilization.

Pricing improved in Nurse and Allied sequentially on a one year and two year basis in 4Q18 as the premium placement trend continues to stabilize. Net of the single client, 1Q19 guidance would have been better than consensus even with the difficult flu comp.  When comparing the guidance for Nurse and Allied before and after the problem client, the negative 600 bps swing resulted in 1Q19 revenue forecast to $333M, lower than consensus of $342M.   Without the headwind management quoted a +5% growth rate (versus down 1% to 2%)  in Nurse and Allied which would have driven guidance well ahead of consensus and our forecast would have been spot on.

Other Workforce Solutions (OWS) and Locum Tenens businesses are the biggest risk to our positive outlook.  We are assuming the stronger demand back drop for Nurse and Allied eventually translates to better results for OWS and Locum Tenens.  Nevertheless, the issues with Locum Tenens, which are being couched as a self-inflicted mismanagement of a sales software deployment, are deeply concerning.  

We think the stock pulls back on the immediate reduction in 1Q19 estimates, but expect consensus to leave the remainder of their 2019 estimates intact given the temporary impact of the single client and flu compare.

With demand currently accelerating, registered nurse unemployment under 2%, and nurse wages accelerating, we believe upside for both volume and pricing is likely for AMN. We see +25% upside from current levels.

ONE-YEAR TRAILING CHART

Stock Report: AMN Healthcare Services (AMN) - AMN Chart