Recently David Dourgarian, my son who runs TempWorks, asked me to get more involved in the company by training new staff members on accounting and finance.Â This request came about because a lot of the new enterprise staffing software deals include licenses to our general ledger accounting modules or alternatively an export to systems like Oracle, QuickBooks, or Great Plains.
Iâ€™ve done this accounting training thing for more than a decade now and have learned to make things as practical as possible.Â My process is to simulate a staffing company startup and show what kind of financial transactions are common and how they get posted.Â Â So we walk through the startupâ€™s common issues â€“ issuing stock, getting a loan, posting the first weekâ€™s temp staffing transactions.Â Often Iâ€™ll pull up the financial statements of public staffing companies like Analysts International or AMN Healthcare and will also point out their market caps (a measure of the value of the company computed by multiplying the number of shares of stock by the current market price of the stock).
The people in the class tend to perk up when this conversation of how much money a company is worth comes up, so I thought maybe it would be of interest to some of the Staffing Talk audience as well.Â In particular the question comes as to why for example AMN Healthcare would have a market cap of roughly $300 million when theyâ€™ve experienced great losses and a rapidly declining revenue base.
I have a technical answer.Â At least itâ€™s the one I was taught in as part of my MBA studies at the University of Iowa.Â The technical answer is that the market cap is the current value of the expected after tax returns of the company from the current moment on ad infinitum.Â So in AMNâ€™s case, the market thinks the company will return profits of about $300 million in todayâ€™s dollars.
The technical answer isnâ€™t satisfying though.Â The $300 million valuation seems unreasonable.Â How can a company losing so much money be worth so much?Â And even if it turned the profit picture around a little, its yearly revenues have shrunk so badly that profits even at good margins wouldnâ€™t amount to much.
Adding fuel to this nonsensical market cap fire is the fact that AMN has more than $80 million in â€śGoodwillâ€ť sitting on its balance sheet.Â This goodwill value comes from past acquisitions (usually).Â In other words, Iâ€™m guessing that AMN made acquisitions a few years back for at least that $80 million and for some reason still believes the purchased companies are still worth that value despite the losses.Â So besides the whole red ink and declining revenue problem, AMN has a credibility problem â€“ why havenâ€™t those assets been marked down.Â I donâ€™t know but usually the answer is that they donâ€™t have to and that they donâ€™t want to because marking them down would increase the loss that they would have to report.Â AMN is not alone with this Goodwill credibility problem.Â Many other public staffing companies have it as well.
There is one other issue with the larger staffing companies that I want to bring up although I have a bias being affiliated with TempWorks.Â That issue is that most of the public companies shot their wad on computer technology with Peoplesoft back in the mid-1990s.Â Peoplesoft, having been acquired by Oracle, is not exactly in a position to nurture their staffing company clients.Â After all, as we just saw from the financial statements, there is no profit to support the public staffing companies making the kinds technology purchases that floats the boat of behemoths like Oracle.
So in summary I donâ€™t have a good explanation for the AMN market cap nor that of many public staffing companies.Â However, in their defense, I could make the same argument of some of the most progressive companies out there like Google, Facebook and Twitter (Facebook and Twitter being traded on secondary markets) who together have a market cap of more than $300 billion even though the total revenue (thatâ€™s sales, not profits) of their target market, online advertising, is less than $75 billion and is shared among dozens of other upstarts like GroupOn and LinkedIn.