On Assignment ASGN
November 28, 2007 - 10:19pm EST by
repetek827
2007 2008
Price: 6.30 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 225 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

On Assignment was written up a couple of years ago by acr913, so feel free to check that original thesis. Most recently the company reported slightly disappointing earnings for q3 and brought down guidance for q4.   The stock fell 23% the following day after having shaved off 27% in value from its 52 week high in August of $11.48.  It seems to me the reaction to the earnings has been way overdone owing to a slight disappointment in the top line from the nursing travel business and an operational misstep in Allied Health.  Momentum investors may have been expecting a beat for the quarter based on some sell-side communication and misunderstood comments from management and threw in the towel at irrational prices, thus creating an oversold value situation with solid intermediate/long term prospects.
 
 
The company breaks out into Healthcare Staffing (32% of revenue), Life Sciences (22%), Physician Staffing (12%) and IT/Engineering (34%).  Revenue growth for Nurse Travel and Allied which are included in Healthcare Staffing segment were -3.7% and +4.6% respectively.   Nurse travel is a stagnant market right now and ASGN had two customers go away in the quarter, one an acute care facility that shut down and the other had unacceptable pricing so ASGN walked away from the business.  The rest of that business grew from $22.1 to $27.8mm .  Allied still had growth but below the market rate which is being addressed through management changes.  When taken in this context and recognizing that 80% of ASGNs overall revenue is still  growing in excess of 12% organically, the model does not seem broken. 
 
Secular story intact
Long term demand for healthcare staffing is still projected to grow 8% and lab support 10% given the aging of the population and demand for higher-skilled workers.  A random visit of teaching hospital websites shows the consistent quarterly growth in postings for nurses and other more specialized workers.  There is also an increasing trend of mature professionals retiring or reducing hours within the field.
 
Solid Management:  Management has done a good job of growing/improving this business. CEO Peter Dameris has an impressive resume.  He helped turn Quanta Services from cash flow negative to +101mm in cash flow in one year.  Prior to his stint at Quanta he ran Metamor Wroldwide which he sold to Psinet for $1.9b near the top of the market in 2000.  At ASGN , EBITDA (ex equity comp) margins were improving before Dameris came on board but they have continued moving up from 2.3% in 2005 to 6.4% last year and projected to be 9.6-9.9% this year.  His team has also made two large acquisitions that have been integrated well and helped to diversify the revenue stream across industries and customers (top 10 customers are less than 8% of revenue) into the ASGN fold.  Insiders and directors own 4.95% of the stokc through shares and options.  Most of the options outstanding are currently under water with average prices at $10.35, 67% higher than current price.
 
Valuation… ASGN’s revenue is 2/3 healthcare and 1/3 IT staffing post the Vista and Oxford acquisitions.   Comparabe multiples are shown in table below.
 
Healthcare                         2007e EPS                     2008e EPS                  EV/EBITDA (2008)
 
CCRN                                               .76                                      .92                                   8.0x
AHS                                                1.04                                  1.23                                  7.5x
MRN                                                 .17                                   .23                                24.0x
 
 
IT
 
RHI                                                   1.79                               2.10                                  10.9x
KFRC                                                 .98                               1.09                                     5.5x
MPS                                                    .85                               .96                                     6.0x
 
If I assume a 2/3 healthcare and 1/3 IT multiple for ASGN (excluding the MNR outlier) then I get a multiple of 7.7x which yields a stock price of $9.94 on 2008e EBITDA of $60mm.  This  multiple seems pretty conservative given 1) ASGN is a temporary staffing model that should be less cyclical than the other permanent  players  2) ASGN is growing faster than the comps 3) ASGN has one of highest GM in industry and plays at high end of the skill spectrum 4) The historical multiples for healthcare have been much higher and have already contracted meaningfully (historical average has been  at 24x P/E and 15x EBITDA)
 
 
2008e EBITDA         60mm
 @7.7x multiple         $462
Net debt                   ($105mm)
-----------------------------------
Equity Value             $357mm
Diluted shares out       35.9
Share price                 $9.94, (67% return)
 
 
The same kind of analysis on P/E basis gets us to $7.80 on GAAP earnings basis using $.60 for 2008 and $11.44 on cash eps basis of $.88.   An average gets us to $9.6, slightly less than EBITDA basis.  ASGN has over $10mm in annual amortization from its recent acquisitions, $5mm of which is deducitble for tax purposes over next 15 years based on a 338 (h)(10) election resulting from the Oxford acquisition, so I would argue cash flow should be used as a better determinant of value.
 
On a free cash flow basis, ASGN is absolutely and relatively cheap. This is not a capital intensive model.
 
2008e EBITDA    62mm
Cash interest         (10mm)
Cash taxes              (10mm)
Capx                       (6mm)
2008e FCF             $36mm, $1.00/shares
 
ASGN trades at 6x FCF, not bad for a business with expanding margins, good secular demand and double-digit growth.
 
At this valuation, the company seems vulnerable to takeover by large staffing company in Europe given the strength of the Euro and  the market share that could be gleaned. ($630mm in revenue is not small potatoes). 
 
At such a valuation, one may ask about a buyback.   There are only 280k shares left on the current authorization (company has repurchased 2.66 mm shares in past year) but given the FCF that should be forthcoming, debt /EBITDA—currently at 2.6x should be under 2 by next year at which point an expanded buyback would make sense ( one could argue even now it makes sense with revised covenants).
 
  Risks:
-         - further operational issues
-          -recession (still think worth more than current price even if earnings fall)
-          -adverse changes in reimbursement rates
-          -cost of housing travel nurses may grow
 
 
 

Catalyst

- increased share buyback through renegotiation of covenants/increased fcf
- potential takeout by European staffing company
- divestiture of Nurse travel business
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