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In my search for interesting potential value stock investments, I look at a lot of small cap companies. Many of these companies are less followed in the market, but also can offer the possibility of outsized returns.

Heidrick & Struggles International (HSII) is a staffing company that I have recently come across. The company specializes in helping organizations recruit senior executives and other top management. Heidrick & Struggles is headquartered in Chicago, and offers its services across the Americas, Europe, and Asia Pacific. The company was founded in 1953 and has a market cap of $218m. Revenues in the past year were $467m.

Here are 4 reasons why I believe Heidrick & Struggles is worth a deeper look:

  1. Companies Need Help Finding Top Talent - There has been a lot of press the last few years about the stubbornly high unemployment rate in the US, which still hovers around 8%. What is often not talked about however, is that there are in fact 3 million unfilled positions in the US labor market. These positions are mostly in highly skilled professions. With the high paced global economy changing so rapidly all the time, companies find it increasingly difficult to attract and retain top talent. This of course also includes skilled Sr. Managers and Executives. According to this article, one of the top professional services companies, Towers Watson (TW), performed a survey which concluded that 60% of global businesses have trouble attracting high-potential workers, and nearly 75% say they cannot find employees with the critical business skills they need. These trends are not expected to get any easier in the coming years, and this bodes well for the business proposition of professional service organizations such as Heidrick & Struggles, which has specialized in finding executive talent for more than 50 years.
  2. The Valuation Is Attractive- The company has an EV/EBITDA of only 2.09. The forward P/E is about 14. Price/Book is only 0.85, and there is over $7/share in cash. Often these kind of numbers you find on companies which have minimal or no growth. However the few analysts which cover the stock have 5 year projected growth rates of 13% per year. Over the first 3 quarters of 2012 vs. the same period in 2011 revenues decreased about 15%. In July the company pulled its full year forecast, citing week economic conditions causing a slow down in the business. Operating income however remained quite stable, actually increasing in 2012 to $20.9m from 19.9m a year earlier. GAAP income increased substantially in 2012 after an impairment charge of $26 million in September 2011. This was a write-off of all goodwill in the Europe region which took place after a restructuring. Now in November 2012, the stock is near 52 week lows, and is down nearly 50% from the high of $23.95/share earlier in 2012. Although revenues have decreased, this doesn't seem justified as operating income and cash flows in general have held up well. Seems like now could be a good entry point to buy.
  3. Company Is Shareholder Friendly - Another point to take note of is that the company currently yields an impressive 4.3%. Over the past 5 years, the dividend yield has increased quite consistently, from below 1% in 2008 to over 4% in 2012. What I also like here, is that there is over 10% insider ownership. This is almost always a positive sign.
  4. Company Is Debt Free For 10 years - The company has zero debt on the balance sheet since 2003. The company's considerable cash pile of $127m, or more than $7/share is also quite attractive.

In conclusion, I think Heidrick & Struggles is definitely worth a closer look as a potential small cap value play to add to your portfolio. This is a niche industry which should continue to see growth in the coming years, and this company should benefit from this trend. With a dividend over 4%, zero debt, and a high earnings yield, why not buy today?

Source: Heidrick & Struggles International: 4 Reasons To Like This Small Cap