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Robert Half’s (RHI) current management, led by chairman and CEO Harold Messmer, Jr., has delivered impressive performance over the past twenty years. The company continues to perform reasonably well in the face of economic headwinds, though a prolonged global downturn would undoubtedly impact profitability. With foreign revenue outpacing domestic growth and now accounting for more than 20% of total revenue, we believe RHI may offset U.S. weakness with better performance abroad. The shares are fairly attractive but not yet compelling.

BUSINESS OVERVIEW

Robert Half is a staffing firm and owns Protiviti, a consulting and internal audit firm. Staffing divisions provide temporary (Accountemps), full-time and project personnel in finance and accounting, temporary admin support (OfficeTeam), and professionals in IT, legal, advertising, marketing and web design (Creative Group). The company has 400 locations and 15,300 employees, including 3,300 in Protiviti. RHI placed 257,000 temporary employees with clients in 2007.

RHI was founded in 1948. Prior to 1986, the company franchised offices providing finance personnel. Current management subsequently acquired the franchised locations.

In 2002, RHI hired 700 professionals from the internal audit and risk consulting practice of Arthur Andersen. These professionals formed the base of the Protiviti subsidiary.

SELECTED OPERATING DATA

FYE December 31
2005
2006
2007
YTD
9/30/08
% of revenue by segment:
Temporary staffing
79%
78%
79%
79%
Permanent staffing
7%
8%
10%
10%
Risk consulting
14%
14%
12%
12%
Revenue growth by segment:
Temporary staffing
21%
19%
16%
5%
Permanent staffing
61%
53%
32%
8%
Risk consulting
36%
13%
2%
5%
Total revenue growth
25%
20%
16%
5%
EBIT margin by segment:
Temporary staffing
9%
10%
10%
10%
Permanent staffing
21%
22%
19%
16%
Risk consulting
18%
11%
4%
1%
Total EBIT margin
11%
11%
10%
10%
D&A as % of revenue
2%
2%
2%
2%
Capex as % of revenue
2%
2%
2%
2%

INVESTMENT HIGHLIGHTS

  • Staffing remains stable, helped by continued growth in international operations. International, which accounts for 30% of staffing revenue, grew 15% in Q3. Staffing revenue remains at near-record levels, with permanent placement fairly stable and technology staffing still growing modestly.
  • Sarbanes-Oxley has boosted demand for skilled professionals in accounting and finance. Since these industry segments are a large part of RHI’s business, the company benefits from the trend toward better corporate governance and internal control over financial reporting.
  • Impressive long-term shareholder value creation. $1 invested in RHI stock on June 30, 1986, was worth $51 at yearend 2007, a 20% CAGR.
  • Astute management. We believe current leadership deserves significant credit for smart strategic decisions such as the acquisition of franchisees post 1986 and the hiring of 700 former Andersen staff.
  • Stock price implies 13% trailing FCF yield, 10x trailing P/E and 25x forward P/E.

INVESTMENT RISKS & CONCERNS

  • Sensitive to economic conditions. Clients’ staffing needs are cyclical, with non-farm payrolls and the unemployment rate key indicators of demand. In Q3, clients “became increasingly cautious with their hiring actions as the quarter progressed.”
  • Revenue down 2%, EPS down 6% in Q3 after years of consistent growth.
  • Low barriers to entry. Competition for both clients and candidates is stiff in the staffing services business, and reputation of the service provider is only one factor driving engagement wins.
  • Reliance on short-term contracts. Long-term deals are not a significant part of RHI’s staffing business, making operating results less predictable.
  • Limited reinvestment opportunities? RHI has spent more than $1 billion on buybacks and more than $150 million on dividends in three years.

COMPARABLE PUBLIC COMPANY ANALYSIS

($mn)
MV
EV
EV/Rev
P/TB
08 P/E
09 P/E
KELYA
432
433
.1x
0.7x
15x
24x
MAN
2,166
2,506
.1x
1.9x
6x
9x
SFN
140
211
.1x
0.5x
9x
12x
RHI
2,762
2,392
.5x
3.3x
11x
25x

MAJOR HOLDERS

CEO Messmer, Jr. 3% │ Other insiders 7% │ Cap Re 13% │ Fidelity 9% │ T. Rowe 5% │ Harris Associates 5% │ Artisan 4% │ Barclays 4%

RATINGS

VALUE
Intrinsic value materially higher than market value?
***
MANAGEMENT
Capable and properly incentivized?
*****
FINANCIAL STRENGTH
Solid balance sheet?
****
MOAT
Able to sustain high returns on invested capital?
****
EARNINGS MOMENTUM
Fundamentals improving?
**
MACRO
Poised to benefit from economic and secular trends?
**
EXPLOSIVENESS
5%+ probability of 5x upside in one year?
*

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Source: Robert Half: Short-Term Challenges, Long-Term Value