A Brief Look at Nurse Staffing

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. 

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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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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.

on small adventures

Happy Post July 4th holiday, everyone. I prefer Constitution Day (9/17) over Independence Day as the Constitution contains the road map for governing a democratic society, versus the Declaration of Independence, which is more of a war document. But who would say no to BBQ and fireworks?

Worth noting here that within both these documents, the word "freedom" only shows up once, in the First Amendment: "Congress shall make no law ... abridging the freedom of speech, or of the press."

These two documents, built on compromise and sacrifice, shape and form our country's intangible assets of "life, liberty and pursuit of happiness" and the tangible assets of a democratically elected government with built in tensions on account of "balance" between three independent branches. They formed our country as a new experiment and provided a road map for other people's pursuit of self governance.

I've served on a few boards (coop, PTA, sports leagues) and just those small cases reveal how hard is self-governance but also how tension and conflict can lead to better decision making.

How each generation resolves those tensions is how we measure up or fall short from any guidepost of american exceptionalism. I see no better example of how far we are falling short than the hilarious / hideous video of wealthy white people screaming at and screaming past each other in a neighborhood aptly named "The Villages". It sums up what seems to be a zeitgeist of national schizophrenia.

I've learned a bit about that disease reading my friend Bob Kolker's book "Hidden Valley Road" (highly recommended). He writes early on: "Schizophrenia is not about multiple personalities. It is about walling oneself off from consciousness, first slowly and then all at once, until you are no longer accessing anything that others accept as real." It is a sad and debilitating disease.

I understand the Constitutional Convention of 1787 had quite a great deal of conflict itself, comprised of the same white and wealthy demographic as "The Villages" (sans women), but at least our forefathers had a loftier goal in mind. The goal now seems solely "politics as circus."

The modern day Village is a dark and dysfunctional place, lacking respect and full of contempt, egged on by those whose sole incentive is to fan their followers' emotions with little regard for long term resolution. All of this is a luxury we can ill afford at present and is certainly not a sustainable foundation for healthy governance.

***

Oh but those emails ...

I was never much favorable to Madame Secretary until a friend of ours and fan of hers asked in 2016 to have a conversation to re-assess my views. I will always welcome a conversation of self reflection, (especially about stocks), and I came away with a reformed view on how much gender bias shaped my perception.

Here was a woman from a fairly conservative family, raised in the 50's and early 60's, smart, precocious and ambitious at an early age, likely aware and reinforced that for a woman to get ahead, she simply can't show emotion. And so she didn't, not through all of the shit thrown at her, deservedly or not, over the last 30-years.

Rather, she was steely and tough. She hid from view or suppressed as best she could any vulnerability. I came to view her as a modern day Marlboro Man, the strong, silent mythological male (in modern times, that silence hides the dysfunction of someone who can't access their feelings). In her case, I think it created an incongruency in what we normally expect from a woman.

I don't know if she would have won if she were a man - her campaign had issues on its own - but I'm confident she would have been more accessible in conforming with people's expectations. Coincidentally, we ended up with male president who almost comically doesn't show vulnerability and has the dysfunction of someone unable to access their feelings. But hey, he puts on a good show, a recurring victory of style over substance.

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I didn't intend to go off on this tangent so let me return to the matter at hand, the small adventure that is the market since March. I wrote early into this crisis in a letter to clients ...

The sun will set tonight and rise tomorrow and eventually calm will prevail again in the markets. For this reason I have been putting cash to work adding to existing holdings or buying other well positioned companies that fit our investment profile. In three years time, I think there will still be consumers and entrepreneurs; franchises seeking to recycle and compost waste; hospitals in need of outsourced IT services; there will still be credit card transactions; and airports and weather; etc. 

The old saying “you know who’s swimming naked when the tide goes out” comes to mind, as this decline may reveal which businesses and what funds are over leveraged, over margined and unsustainable. But skinny dipping is fun and I don't want to pick on it.

As we think about the beach, I'd rather remind bathers - beclothed and bare - how to survive a ripcurrent. I imagine getting pulled past the break might be terrifying but the worst thing to do is panic. Either swim parallel to shore, or tread water and float since the circular nature of the current may shortly return you to shore.

... and lo, for those who did nothing, the market brought us back close to where we started.

Painfully, this hasn't been the case to date for the small companies in our portfolio. "Ours" means mine and my clients, my wife's, our friends, my sister's retirement savings, the institutions and individuals who entrusted me with stewardship of their assets, all totalling roughly $5M in AUM at the beginning of the year that has diminished on paper by roughly 20% as of this writing. It's a hard feeling to underperform. Navigating the analytical vs emotional process is part of the parcel.

Our portfolio is skewed towards services companies, which are asset lite and have operating leverage. They solve important problems for their customers such as cyber-security planning, nurse staffing or managing waste streams. "Man hour labor" businesses tend to lead cycles; first in / first out. They have the capital to survive and while patience is trying at times, I am a long term investor in sound businesses at reasonable valuations. I expect they will endure and grow in time.

Through this adventure I've been thinking about one of my favorite stories of survival, that of John Aldridge, the local Long Island lobsterman swept off his boat in the middle of the night and 40 miles at sea.

As I re-read that, it got me thinking about stories of people getting lost, which is akin to the feeling I get trying to make sense of this market that is supported by QE^n and the never ending stimulus. I feel lost trying to reconcile market valuations with municipal budgets, declining GDP and missed mortgage payments, etc. (Here is a funny blogpost by Frank Martin who also trying to make sense of it all).

I read about Geraldine Largay who got lost and died in her tent not far from the trail and less than 200 miles from the end of the Appalachian Trail. I remembered reading about two teenagers who got lost and died when they were overcome by a fogbank while kayaking off the coast of Nantucket. It eventually inspired a book about navigation by Harvard physicist John Huth who was coincidentally lost in the same fogbank but survived. And the story of four tourists travelling in the US in 1996 that got lost in Death Valley National Monument and how their remains were eventually found.

There is a recurring tendency for people who are lost to panic, to seek action, to move. And then, either b/c one leg is shorter than the other or there they are not paying attention, they end up walking in circles.

The key is that when you're lost, you don't panic. The Boy Scouts teach "STOP" (Stay calm, Think, Observe, Plan). Why would someone need to be reminded to think? B/c gripped by panic, it's usually the first thing to go, and if you can't think, you won’t be able to find a reference point to re-orient or work your way out of the problem.

One way I've found to work my way out of the problem of the market adventure is to find new ideas. I'll spare the trouble of re-writing what others have done so well and suggest reading about $SMIT by @Deep Value Observer on twitter (I thought I was one of only people in the world watching that stock) or the MicroCapClub forum on $LSYN (I agree mgmt stinks but the podcast business continues to grow and activists are still engaged; what could this look like with a competent CEO?).

I also go on my own adventures and take day hikes up in and around nature. It is as accessible as the outdoors and with summer foliage even city parks offer lush vantages that hide the presence of man.

The Patient Investor's family recently took a day hike up in the Adirondacks. Walking through a wooded trail, climbing a summit, focused only on the surround sound of nature and the placement of the next footstep, it was easy to access a sense that we are all working for something bigger and grander than ourselves.

It's a universal feeling I think, but one too often tethered to a cause or belief. As comforting as certainty may feel, once we cling to it, we are anchored to an idea that can crowd out reason and create new biases. Uncertainty in contrast, a base principle of science and investing, is a bit harder to pin down. But learning to live with it and the knowledge that maybe we are all a little lost at times is itself a victory of substance over style. 

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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.

Thoughts on PESI from LCA Y/E Letter

Perma Fix (PESI) is one of the newer holdings in the Long Cast Advisers portfolio. I wrote about it in our year-end letter (link) and wanted to just focus on it here for interested followers. 

PESI operates in the nuclear waste remediation business through two segments.

The Treatment segment (62% of TTM revenue) is an asset heavy operator of low level and mixed low level radioactive waste facilities in Tennessee and Washington and a liquid waste facility in Florida. (Can go here and search by site ID for RCRA information or the links below for the company’s self reported information.)

Tennessee. Diversified Scientific Services (DSSI). Site ID: TND982109142

Washington. Perma Fix Northwest (PFNW). Site ID: WAR000010355

Florida. Perma Fix of Florida (PFF). Site ID: FLD980711071

Treatment is a capacity utilization business where volume growth offers operating leverage and non-linear margin expansion once fixed costs are scaled. 

Historical financials understate the true earnings power of this segment for two reasons: 1) TTM results are negatively impacted by closure costs for a facility ("M&EC") that is now closed. Excluding those costs, which are one time in nature, proforma margins are in the ~30% range. 2) PESI has never operated a strong Services component but now that one is growing, it can feed additional volume to treatment facilities, where incremental margins are +70%. In short, I think the earnings trajectory in Treatment may shift positively.

Concurrent with the closure of M&EC the company exchanged pf'd shares for common at $4.80, which served to simplify the capital structure. Furthermore, with the closure, the company received $5M from its insurer that had been held in collateral associated with insuring the facility, a benefit to the balance sheet and w/c. 

The Services segment (38% of TTM revenue) is a variable cost model. It’s essentially boots on the ground in Tyvek suits with picks and shovels plus engineering expertise, et al. This segment is benefiting from a turn-around under relatively new CEO Mark Duff, appointed in 2017, having replaced the founder who had run the company for decades. The growth in services has the multiplier effect of increasing waste volume to Treatment.

An interesting part of the Services turnaround in my mind is that the Mr Duff actually once ran and grew this exact business. A look at old filings and self reported biographies indicates that in the mid-2000’s until 2010 he was President of a company called “Safety and Ecology” where he grew revenues from $50M to $80M. He was running it when it was sold in 2008 to what appears a fairly schlocky public rollup called Homeland Security. He was gone however by 2011 when SEC was sold to PESI, which failed to sustain its growth (ie drove it into the ground).

After SEC, Duff was a project manager at the Paducah Gas Diffusion site, first for LATA-Kentucky and then for the Shaw Group / CBI JV that took over the site when that contract changed hands. Now he’s back at the original SEC and two years into a turnaround that is taking shape.

I'm writing a fairly abbreviated summary here. A lot of information is disclosed in the financials. One of the aspects that worried me during my d/d related to the growth in fixed price work on the Services side. Any company that goes into a new business under f/p terms is asking for trouble. However, as I understand it, this is not hard dollar / low bid / fixed price rather it's fixed unit price so there is limited risk of taking a loss on a services contract. 

And IMHO the pros > cons. The company has a lot of attributes I find attractive and various tailwinds to support growth. It is easy to understand and has a long operating history accessible for analysis. Its primary customers (DOE, DOD cleanup sites, et al) are spending money and re-letting contracts after a long lull, including potentially large contracts on which PESI is rumored to be a named sub-contractor.

Finally, large legacy contractors like Fluor and AECOM are selling / have sold their managed services businesses to private equity, who in turn I think are mostly attracted to the outsourced IT programs. This could create potential disruptions for themselves and opportunities for smaller companies like PESI, especially given its newly installed but experienced management team.

At current prices - after Friday's sell off - the company is valued at ~$90M EV. It trades at 1.5x TTM revenues, 6x TTM gross profit and 18x pro-forma EBITDA (after adding back one-time closure costs). This looks expensive, especially given AECOM sold their managed services division for 12x EBITDA. Some of the multiple is driven by rumours of the large contract I mentioned above. 

If we apply 12x EBITDA to just the Services segment, this implies the Treatment business trades for 1.5x sales and that’s hard to fathom. PESI’s Treatment business is one of three named contractors on DOE contracts to handle low level waste. The others are Energy Source and Waste Control. Those two tried to merge in 2015 a deal valued at 8x sales that deal was blocked on anti-trust grounds. I’m pretty sure 8x is not the right sales multiple for PESI’s treatment but in an environment like we have today, with increased volumes concurrent with high barriers to entry, it is likely worth more than the multiple inferred by comparative valuations on the Services business.

Regarding the sell off, I think the contract everyone is waiting for was supposed to be awarded by the end of January. It wasn't. Why not? There's a protest on a separate contract at the Hanford site, which is pushing out the schedule for other contracts. Overall, if they win the contract, it’s revolutionary but even if they don’t, the increased spending in general will lift all boats in the space. (But it would be better if they won). 

Historical figures are only good as a baseline and investors will make money on future results. What can this company look like in an environment where a large customer is spending again, there's some competitor dislocation and a relatively new management team that for the first time has Services experience? 

I think for the long term shareholder, it offers a wide success pathway and ample opportunity for returns even though current multiples don’t screen for value. But you should do your own homework. I'd be happy to hear what you find and I am always open to critique. 

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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.