RCM Technologies Should Benefit From Multi-Billion Dollar Government Programs

RCMT is in my opinion the most compelling small company in the market. RCMT has:

• Talented, dedicated management with long tenures and very high insider ownership
• A very aggressive buyback policy
• Billions of dollars of increased government spending heading directly for its end markets
• A P/E around 6x

A recent article from Jeremy Blum highlighted that the growth that RCMT has delivered during the pandemic years is actually largely sustainable and management expects the first half of 2023 to be roughly comparable to the second half of 2022.

While Jeremy's article effectively gives background and context for where the company is now, I believe that most investors are unaware of the size of the opportunities that RCMT is positioned for and thus view the aggressive buyback with skepticism.

In this article I would like to highlight the size of the opportunities and explain why RCMT recently repurchased more than 10 % of the stock at prices 30%+ higher than the current price.

In short, RCMT's end markets are about to see spending booms unprecedented in all of U.S. history, and that is why management is buying back stock so aggressively. I don't believe investors currently realize that this enormous amount of government spending is going to directly benefit RCMT.

Billions of Dollars of Government Funding in Three Critical Industries

RCMT is positioned to provide staffing to three critical industries that are likely to grow very quickly due to many billions of dollars of government funding over the next several years.

Those markets are healthcare and special education in schools, decarbonization engineering and general aerospace.

Healthcare in Schools, Special Education

RCMT has stated both on the recent conference call and in company videos that they are the largest provider of school healthcare workers and therapists in the United States as they have major contracts with the New York and Chicago school systems as well as many other smaller school systems across the country.

"So when you look at the school market, we believe we're the largest health care provider to the school market in the country, but we're still just capturing a pretty small percentage of the overall market. And the growth is clearly there. And we're just scratching the surface, frankly, on the behavioral health side, which we think is just an explosive market. It's big today and 3 or 4 years from now, it's going to be 10x as it is today, in our opinion."

The question that investors therefore need to ask themselves is how large are the increases in funding in this area going to be? The answer is that they will be unprecedented, and so it is actually very possible that the behavioral health side will 10x just as management says.

There will be billions of dollars spent on this in the next few years and securing staff will be a core bottleneck, which directly positions RCMT to benefit from these billions of dollars in funding.

In government funding, my understanding is that the BSCA alone will provide more than $1 billion for only mental health, and there are additional non-BSCA sources of government (state, local) funding providing billions more.

In terms of the implementation of this funding, a list of awards was announced in February with Chicago schools receiving one of the largest grants at $3 million. Importantly, every dollar spent in funding that goes to RCM clients may result in much more revenue for RCM. For example the award in February was for $188 million and will facilitate the hiring and training of about 9,000 staff, meaning adding each worker requires about 20,000 in funding. Every additional worker at RCM adds about 70,000 to RCM's top line, so if the above funding were to catalyze the additional hiring of 150 additional staff in Chicago and RCM were to manage the hiring of one third of them, that would be an additional $3 million to RCM's top line from Chicago alone.

Importantly, this is just in mental health, it does not include staffing increases in either physical health or special ed, both of which RCM is very strong in and are benefiting from increased government funding as well.

There is also hundreds of millions of private funding directed at increasing the supply of nurses.

Zooming out from education to healthcare overall, there is also an overall nursing shortage. One key aspect of nursing is the number of patients per nurse in a given shift. While an ideal number is something like four, because of the nursing shortage this number is often seven or more, much higher than it should be, with nurses recently going on strike in New York City to demand higher staffing levels. In other words this is an ideal environment to be a general nursing staffing company in addition to a school specific nursing company.

Decarbonization Engineering

I believe there are large opportunities here, including sustainable aviation fuel which was a large driver of RCM opening its Thermal Kinetics Innovation Center. On the highest level, CEO Brad Vizi described the situation well on the Q2 call.

With investments totaling roughly $369 billion allocated to energy security and climate change, we believe our expertise in advanced biofuels, ethanol and carbon capture and conversion technologies affords us a strategic advantage in helping our clients decarbonize the economy.

While this is obviously only a high level discussion, there is clearly a very major tailwind there, and this is very likely the largest amount of government spending to ever be directed towards RCMT's end markets in environmental engineering. RCMT was actually an environmental technology company before it was a staffing company as its initial business was focused on reducing sulfur output from coal power plants.

Aerospace

RCMT also benefits from increased aerospace spending.

Defense aerospace spending has increased due to the war between Russia and Ukraine. RCMT has a long history of working with Lockheed and cited increased demand for the F-35 as a demand driver.

RCMT stated that its aerospace business has more than doubled since mid 2021 and is likely to continue to grow.

Competitive Landscape

RCMT operates in large, competitive industries. However, it has a number of advantages in these industries including a long operating history with top tier clients (Lockheed, City of New York etc), and talented, dedicated management. These advantages have allowed them to take share.

Third, we are clearly taking share in many of our end markets. I do not remember a time where we were able to displace as many incumbents as this year. I believe the pandemic exposed the deficiencies of our competition leaving us in a position to capitalize as a result of significant investments made in the enterprise, its talent and fostering a culture with a maniacal focus on delivering first-class solutions for our clients. All of these efforts have translated into a step change in performance for RCM Technologies.

In particular, they are the largest provider of healthcare workers to schools in the entire United States, and that scale should provide a large advantage. If they are even able to hold their existing market share they should be major beneficiaries of the large increases in government funding, yet they have recently been taking market share and with Elon Musk filing a 13G market share gains may continue.

Visibility

RCMT management generally has excellent visibility into future revenue because of the nature of their contracts, as it takes weeks or months to train and place large numbers of professionals. They have a strong sense of what will be happening 1-3 quarters in the future. Management buybacks should generally be viewed as strong signals about likely outcomes in the business.

Scalability

RCMT's business is very scalable if they can win business with large enterprises. On the Q3 2021 call CEO Brad Vizi stated:

All of our businesses are very analogous to the example of financial services where you have a fund manager that might be throwing up 25% a year for five, six, seven years, but he still only has $50 million of AUM, then suddenly gets a seed from a named brand investor 24 months later. It's a $2 billion AUM business. I think that, that dynamic in our space is very analogous and it's exciting. As a result, we haven't had to look at any major acquisitions to grow the business. We believe that our platform brings a lot to the table for both entrepreneur and the shareholders and all the stakeholders at RCM. So the ability to grow capital efficiently is probably one of the more attractive features to our business model.

Since they already have the Chicago and New York school districts, they are already in this position in the healthcare staffing market.

Company History

RCM started as an environmental technology company in Los Angeles in 1971. It went public in 1981 and gradually expanded into providing engineering staffing and healthcare services. RCM has been serving defense contractors, large government clients, and school districts, for many decades. Current CEO Brad Vizi came into his position via proxy fight in 2013, simultaneously Roger Ballou, former CEO of RCM competitor CDI joined the board. Since then operations have slowly but steadily improved, and management has bought back very large amounts of stock.

Why RCMT Is Near a 52-Week Low

RCMT became a minor meme stock during the 2021/2022 pandemic frenzy in microcaps. This likely lead to a large number of speculative buyers who either bought as quantitative, algorithmic buyers, or as individual investors who are not attentive to the developments of the underlying business. This has likely created a large backlog of individuals who are looking to sell shares without being sensitive to the fundamentals. RCMT in particular sold off recently due to the U.S. banking crisis, then had a strong fourth quarter conference call, but no apparent uptick in investor interest following the call, at least not in proportion to the overhang of sellers. I think it's likely that management continues to buy stock throughout this time and reduced the share count by another 2 % or more.

Why RCMT is Overlooked

RCMT is overlooked because it is both a small company and completely unique. It operates in three different industries, has been an incredibly wild ride from a stock chart perspective, and has no promotional management with no investor presentation and no attendance at conferences. I think the extremely aggressive repurchases are also so much higher than a normal company that it throws off investors. There is also no company in the market that is so directly positioned to benefit from so much government spending in such a diversified way (across multiple business lines) and so it is just hard for investors to get comfortable with something so unique.

Management, Insider Ownership, Tenure, Dedication

Accounting for recent repurchases, management owns roughly 30 % of shares and this number is likely rising all the time. Another notably positive aspect of RCM is the tenure of most of the executives. CEO Vizi has been in his current position since 2013, and all of the other top executives have been in their positions much longer. This is rare and a major positive.

The board is uniquely strong for a small company, with a high level executive from AWS and a Y-Combinator alum both on the board. There have been no insider sales this year and none anywhere below $14.95.

Finally, CEO Vizi appears to have taken a recruiting trip to the Philippines for healthcare recruiting and posted many pictures of the event on March 31, hopefully an indicator that the company continues to highly prioritize recruiting additional nurses.

Risks

RCMT contains three separate divisions, each of which has multiple lines of business within it. While the entire business is centered on recruiting, the different industries within each division create substantial complexity. There is definitely risk that this complexity creates missteps or a competitive disadvantage. One hopes that if this complexity becomes a liability management will make the necessary divestments.

There is also the possibility that the large amount of government spending causes a much larger company to enter the space. If a very large staffing company comes directly for RCMT's end market's their much smaller size will leave them little ability to compete.

If current management were to leave I would absolutely exit my position. The tremendous tenure of all of the top executives is a major positive, and if they were to leave right in the midst of this much government spending it would be a clear signal that something is wrong.