For the tl/dr crowd >> Writing about Cross Country Healthcare, a nurse staffing company. At the recent price of $9 it has a market value of $325M. With $53M in net debt, an EV of $380M. Trailing revenues are $836M compared to $816M in FY18 and $822M in FY19. This isn't a growth story it's a mature business that's been under-managed for decades whose founder has returned after a +20 year hiatus, a time period that included several significant entrepreneurial successes for him, including in other biz services. His last mgmt role was a PE roll up sale to CCRN's largest competitor AMN. Already seen SG&A decline from $180M / year down to annualized $160M / year. COVID has helped speed this up + brand reductions (from more than 20 to 1) + new investments in technology. Mgmt target doubling EBITDA margins from 3% to 8%. Not an aggressive reach. Largest comp AMN is a 10-year 10x via levered acqs. Under new and experienced mgmt, this can too.
There are many ways to think about a company and structure an investment narrative, for better or worse, and rightly or wrongly. Like plastic bags, narratives are easy to construct and hard to get rid of, and they drift around our minds long after they've outlived their purpose. An investment narrative that wraps too tightly and explains too much doesn't leave room for the reality of life and its inevitable surprises. One held too dearly exerts a gravity on perceptions and pulls objective data into an orbit of conspiracy. Investors need be cautious with their investment narratives as one is cautious with a box cutter; inadvertently left open it can cause harm.
I'm particularly cautious of narratives around heroic CEO's who turn companies around b/c the deux ex machina is a prop of theater not an investment thesis. But despite all this, here I am thinking about Cross Country Healthcare (CCRN), which strikes me as an opportunity given its new entrepreneurial CEO, who also happens to be the company's co-founder.
In the mid-80's, Kevin Clark co-founded this specialty nurse staffing company with Joe Boshart and then left after it was acquired by WR Grace and subsequently passed into PE hands. Boshart, the other co-founder, took it public in 2001. William Grubbs, a staffing industry lifer, took over as CEO 2013 to 2019 (he's now Chairman at Volt). And now this +30 year old company is on its 3rd CEO who happens to be the co-founder.
Clark's long interim history is worth noting. He was CEO of Poppe Tyson in 1997 and saw it through the merger with Modem Media in 1998, establishing himself as an executive in the early digital marketing world. His self reported business bio shows a string of other entrepreneurial leadership roles (I think he fell in with the PE crowd and was a go-to CEO for a variety of firms).
Most recently he lead the roll up of Onward Health, a Welsh Carson backed firm that included nurse staffing, physician staffing and a SaaS vendor mgmt system, and was sold in 2015 to CCRN's largest competitor, AMN Healthcare, the only other publicly traded company in the medical staffing industry.
What's most appealing is that the staffing industry - a low fixed cost "your assets leave everyday" kind business - especially favors entrepreneurial management and this is particularly important given Clark's history of success in the industry and related fields relevant to the industry. He brings that experience to a business that operates at scale - it is the 5th largest nurse and physician staffing firm in the US - but has never been managed aggressively.
I covered both AMN and CCRN as an associate 2004-2006 and back then CCRN was always the smaller and not-quite-as-put-together as AMN. Until late last year, I hadn't looked at either in ages, but with COVID, I could see a need for helping hospitals staff emergency medicine, so I took a look. I saw that AMN has been a 10-bagger over the last 10-years and CCRN has done nothing except continue to exist at scale. And it had a recently appointed new / old CEO returning after a +20 year hiatus.
Given the new CEO, there is little relevance to the company's long term history except that it's pretty consistently been a low margin business with little organic growth. The company is also poorly diversified with 90% of revs and 95% of OpInc from nurse & allied staffing (even pre-COVID) and nominal contribution from physician staffing and search.
Recent history shows higher returns and improving TBV / share - a sign of value creation - but it's hard to pin that short term success on any one thing Clark has done, particularly given how skewed the market is from COVID. The point is, what he's done so far, very little shows up in the financial statements.
When Clark joined the company in January 2019, it had over 20 brands and more than 60 branch locations, the results of unintegrated acquisitions and years of under-management. He's whittled the company down to one brand and ~15 branch locations (taking advantage of wfh to close branches and reduce the company's RE footprint). These are the kinds of things that a reasonable manager does. The resulting writedowns make recent financials somewhat "noisy" but have an expected impact of $20M in annual cost savings. Already on a quarterly basis SG&A has declined from ~$45M to ~$40M indicating some success with this endeavor. That shows up on the income statement but is masked by the headwinds of COVID.
Then there are investments in new technology - even through COVID - at a pace, one gets the picture, that hasn't been done before at the company. The benefits of a new technology stack by someone who has experience doing such things, and with experience in the industry and with experience in turnarounds, offers a variety of ingredients to success. Again, none of this shows up on the income statement.
COVID casts a pall over everything. Charts below show volume and price metrics for nurse staffing (left) and physician staffing (right). Staffing is a bill / pay spread business and the impact of the pandemic sees declines in nurse volume offset by increases in price and no seasonal uptick in the physician side, probably b/c nobody is going away on vacation.
With little to observe about CCRN under the new CEO, let's take a look at its largest competitor, AMN. Over the 10-years where the stock price increased 10-fold, it added specialties and technologies to sell to hospitals, including the 2015 acquisition of Clark's last company and most recently an acquisition in the telehealth space.
Looking at some summary data below, one's eyes no doubt, if they don't gloss over or go cross eyed, will eventually be drawn to growth in EBITDA margins and in returns punctuated by jumps in debt / equity and negative TBV / share.
One would correctly draw the conclusion that this company engages in debt funded acquisitions of higher margin services, not a bad way to operate for a low fixed cost, services based, cash flow generating business with cheap access to capital. As a result of these acquisitions, AMN is much more diversified, perhaps why AMN is a darling of the two companies. But before it started its acquisition and expansion efforts, it looked a lot more like CCRN.
CCRN shows no such evolution, yet. But what if it could? What if with the right technology platform and targeted acquisitions, the types of things the CEO has done before, CCRN, which is relatively underlevered, could acquire higher margin ancillary businesses? Why wouldn't it, in the right hands, be able to copy the AMN playbook, even at least partially?
The downside is that this mature company remains consistently a no growth, low margin value trap. The upside however offers the opportunity for significant returns. With changes by the new CEO and more still to come, I think the patient investor could experience the benefits of these returns over time.
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