More DD on WHAI...
I've probably spent more time doing DD on this company prior to a purchase than I have spent on any company. I've probably put in about 6 hours. There are two reasons that I spent this much time. The first reason is that WHAI is one of those stocks where I can make a case that it will go up significantly but I can also make a case that it will go down significantly. The difficulty is in determining the probability that it will go one way or another. The second reason that I am interested in it is that I've always wondered how the medical staffing industry compares to the technology staffing industry.
The first topic in my DD is the state of the medical staffing industry. This is probably the most important thing to understand because the staffing industry can be very cyclical. There are a number of publications on WHAI's web page that indicate that the industry is growing as a whole. This is due to the increase in demand for nurses coupled with the decrease in availability of nurses. This generally points to a good outlook for the industry. CCRN, a competitor of WHAI had the following statement in a recent PR: "Demand for our contract travel nurse staffing service, as measured by the average monthly number of open orders from our hospital customers, is currently at the highest point of demand for the past 30 months." Generally, I think the outlook is good to very good. However, I also remember how quickly the technology staffing industry went from great to horrible. That only took one year! I will say that I found WHAI's investors page very helpful.
It is interesting that WHAI seems to be doing much better than others in the medical staffing industry. I looked at the results of five other companies including AHS, MRN, CCRN, ASGN, and TSTF. Only AHS and CCRN made money in the most recent quarter. Revenue doesn't seem to be changing much for these companies either. This tends to discount the view above that medical staffing is a growing industry. Possibly, this means we are at the beginning of a breakout for the industry. I'm not sure.
I think the second most important thing to understand regarding WHAI is why they are doing better than other medical staffing companies. I don't find it that surprising that there is this big of a desparity in financial performance among the companies in this industry. Staffing is really a sales business. There is a huge difference (maybe 10X) between the best performing recruiters and the worst performing recruiters. If management attracts the best, then the companies performance will be far superior to the competition.
One thing that I wonder is whether the recent acquisitions have created a temporary increase in revenue. One of the things that WHAI has done is to cross check their candidates and job orders after each acquisition. This is a smart thing to do as they may have some easy placements. However, this could potentially also cause a short term surge in revenue and profitability. Of course, now that they are combined, they will do this cross checking on a real-time bases. The question is how much of this revenue increase due to cross checking is is a short term effect and how much is a long term effect.
The analysis of their financials is as follows:
Earnings
- They are projecting EPS of $0.50-$0.55/year for this year. This is impressive given their price of $3.54/share! This includes a 12% tax assumption. They expect being tax payers in Q3.
- For Q1 they made $0.08/share. This included derivative income of 1.3M. Excluding the derivative income they made $0.05/share.
- They are guiding for EPS of 9-11 cents for Q2.
Balance Sheet
- The balance sheet is scary. They have shareholders equity of $50M but have $65M of goodwill on the books!
Shares
- They currently have 46M shares outstanding.
- They have convertible preffered shares that can convert into 4.3M shares of common stock. The stock converts at a fixed price so there is no up or down side in the conversion.
- They have 2M warrants outstanding and no stock options outstanding.
Currently WHAI is trading on the OTCBB. They have applied for an AMEX listing and will have the symbol WHA. They do not anticipate problems in getting listed. I couldn't find an indication of when they think they will move to the AMEX.
One other thing about this company is that the Chairman and CEO is only 32 years old. I prefer to have a little more grey hair than that!
I have a tough time picking a strategy on this stock. I'll likely either buy a small position now or wait until the next quarter's results are out to make a decision. Obviously, if they hit their projections, they are an excellent investment. At this point I give them a 60% chance of hitting their projections. If they make their Q2 numbers I think the prognosis is much better. The tough thing is that they have had a recent uptick in their performance. Q1 is when the EPS improvements kicked in. It is always hard to anticipate if these kinds of upticks are sustainable.
Bobwins, feel free to ask me any more questions. I've done significant DD on this one and there is probably more that I could write than I have.
Sitting on the fence,
Mike
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