The pandemic exacerbated the U.S. medical staff shortage. The increase in workload due to COVID-19 forced already overworked healthcare workers to quit, leaving a wider gap that AMN Healthcare Services aims to fill. With its diverse staffing solutions, AMN Healthcare Services capitalized on this pandemic-driven demand, elevating its return on assets (ROA). However, The market expects demand for healthcare staffing to decline in the coming years. In today’s FA Alpha Daily, we’ll look at AMN Healthcare Services using Uniform Accounting and see how it will generate high returns despite low expectations from the market.
FA Alpha Daily:
Tuesday Company Specific
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The COVID-19 pandemic resulted in an unprecedented strain on global healthcare systems, leading to a significant shortage of medical staff in many regions.
Infection among healthcare workers, training and education disruptions, mental and physical exhaustion, and a variety of other reasons resulted in this shortage.
Now with the pandemic seemingly left in the dust, it seems like this dry spell of medical staff is over.
That statement couldn’t be more wrong…
According to the Association of American Medical Colleges, the United States is projected to face a shortage of up to 124,000 physicians by 2034 as demand outpaces supply.
Likewise, according to data from the Health Resources & Services Administration, the U.S. needs more than 17,000 additional primary care practitioners, 12,000 dental health practitioners, and 8,200 mental health practitioners.
Shortages in healthcare workforces are not a new challenge. However, the COVID-19 pandemic has exacerbated the problem significantly.
Burnout is a key reason for shortages. The pandemic worsened burnout among the medical workforce. A study in the Journal of the American Medical Association showed that 32% of doctors and 41% of nurses reported feeling burned out in 2019. Fast forward to 2022, and that figure has risen to 40% for doctors and 49% for nurses.
The burnout that the pandemic created combined with long-standing problems like aging of an entire generation and lack of nursing faculty means the shortage of medical staff is not going to fade away easily, although the pandemic is more than finished.
There are a few companies that stand to benefit from this shortage: AMN Healthcare Services (AMN) being one of them. The company is a leading provider of workforce solutions and staffing services to the healthcare industry.
It specializes in providing healthcare professionals on a temporary and permanent basis to hospitals, healthcare facilities, and other organizations. This includes nurses, physicians, and “allied” health professionals like dental hygienists, physical therapists, and speech language pathologists.
The high demand for healthcare staffing during the years of the pandemic resulted in high profitability for the company.
AMN’s return on assets (“ROA”) jumped from 21% in 2020 to 39% in 2021 and then to 66% in 2022.
The chart shows that the company performed incredibly well during a time of healthcare staffing shortages. Clearly, as these shortages continue, AMN should continue performing well.
And yet, the market fails to recognize this opportunity.
We can see this through our Embedded Expectations Analysis (“EEA”) framework.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At the current stock price, the market expects the company’s ROA to fall below 30%, assuming the demand will collapse.
Given the growing shortages in the healthcare sector and the company’s essential position in its supply, these expectations seem overly pessimistic.
AMN has substantial potential to scale its operations and continue benefiting from these continuous healthcare staffing shortages.
That is why AMN showed up on our screen. The company makes a great FA Alpha 50 name due to its potential for high returns and low expectations from the market.
Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.
Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”
Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.
The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.
The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.
That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.
This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.
See for yourself below.
To see the other 49 names on the list, click here.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
Today’s highlight, AMN Healthcare Services (AMN) is one of the top stock picks from FA Alpha 50 this month. To see more stock picks like this, become an FA Alpha and get access to FA Alpha 50.