This post has been excerpted from a letter by Chip Rewey, Lead Portfolio Manager of the Third Avenue Small-Cap Value Fund.
Founded in 1985 as a travel nursing company, AMN has become a leading healthcare staffing company that offers temporary placement of healthcare professionals for hospitals to fulfill various durations ranging from one day to 2 years. Since 2013, the company spent a total of $360MM on several acquisitions to enter the “solutions” business (outsourced recruiting, permanent staffing, managing personnel, and software scheduling for hospitals) to extend its portfolio. In terms of profit drivers, travelling nurses and allied healthcare workers contribute to about 55% of pre-overhead EBITDA, while temporary physicians and the new Solutions segments contribute approximately 20% and 26%, respectively.
In its core business, which is filling staff shortages, AMN provides the crucial exchange between demand and supply. Hospitals need an intermediary such as AMN to find healthcare workers, vet their credentials, handle all administrative tasks, make payments, and provide workers’ comp and medical malpractice insurance. Healthcare professionals need a source to find work, arrange travelling, and receive weekly or biweekly paychecks. While it does not command the same level of operational leverage as international networks such as eBay, Facebook, or Uber, AMN’s economics do significantly improve as it becomes larger. As AMN further expands into Solutions and integrates itself into hospitals’ staffing functions (MSP or Managed Service Provider), it further enhances its market position and cements its relationship with its clients.
We think AMN is benefiting both from positive demographic trends, which provide good growth, and margin expansion. Beyond the Affordable Healthcare Act that increased the insured population by about 20 million people, the aging population and the shortage of healthcare professionals will create strong demand for temporary staffing services. Benefiting from operational leverage, management expects operating margins will continue to expand. With the high level and growing free cash flow, we think AMN common shares have 30% potential upside to our NAV target.
IMPORTANT INFORMATION
This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.
The information in this portfolio manager letter represents the opinions of the portfolio manager(s) and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed are those of the portfolio manager(s) and may differ from those of other portfolio managers or of the firm as a whole. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio manager(s) views are as of June 30, 2017 (except as otherwise stated), and are subject to change without notice. Certain information contained in this letter constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof (such as “may not,” “should not,” “are not expected to,” etc.) or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of any fund may differ materially from those reflected or contemplated in any such forward-looking statement. Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.
Date of first use of portfolio manager commentary: July 17, 2017.
Past performance is no guarantee of future results; returns include reinvestment of all distributions. The above represents past performance and current performance may be lower or higher than performance quoted above. Investment return and principal value fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. For the most recent month-end performance, please visit the Fund’s website at www.thirdave.com. The gross expense ratio for the fund’s institutional and investor share classes is 1.40% and 1.65%, respectively, as of March 1, 2017. Please be aware that foreign securities from a particular country may be subject to currency fluctuations and controls, or adverse political, social, economic or other developments that are unique to that particular country or region. Therefore, the prices of foreign securities in particular countries or regions may, at times, move in a different direction than those of U.S. securities. Prospectuses contain more complete information on management fees, distribution charges, and other expenses.
Third Avenue Funds are offered by prospectus only. The prospectus contains important information, including investment objectives, risks, advisory fees and expenses. Please read the prospectus carefully before investing in the Funds. Investment return and principal value fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. For updated information or a copy of our prospectus, please call 1-800-443-1021 or go to our web site at www.thirdave.com. Distributor of Third Avenue Funds: Foreside Fund Services, LLC.
Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.
About The Author: Chip Rewey
Mr. Rewey is the leader of Third Avenue’s Value and Small-Cap Teams, serving as the Lead Portfolio Manager for the Third Avenue Value and Small-Cap Funds. Mr. Rewey joined Third Avenue Management in 2014.
Before he joined Third Avenue, Mr. Rewey spent more than ten years at Cramer Rosenthal McGlynn, LLC as a Senior Vice President and Senior Portfolio Manager where he oversaw the firm’s smid, mid, large and all cap investment strategies. Prior to Cramer Rosenthal McGlynn, Mr. Rewey was a Senior Portfolio Manager at Sloate Weissman Murray & Company, where he worked directly with the Founder on research and portfolio construction. Mr. Rewey began his career as an Acquisitions Analyst for Associates Corporation of North America before moving on to roles at Oak Value Capital Management and Smith Barney, Inc.
Mr. Rewey earned an M.B.A. in Finance from Duke University Fuqua School of Business and holds a B.S. in Finance from Boston College, graduating Magna Cum Laude. He is a member of the New York Society of Security Analysts.
More posts by Chip Rewey