In recent periods, the Federal Reserve has been dedicated to pursuing monetary expansion in order to stimulate economic recovery. Some key parts of the economy are showing substantial recovery, whereas others are still in the initial stages. This segmentation of different stages of industry recovery is clearly reflected in the staffing industry's growth in different segments. A number of studies have indicated that most sectors have been showing a decent recovery over the past year. In this situation, the staffing companies with a focus on growing and recovering segments of the economy are likely to perform better than their competitors. The unemployment rate of the US currently stands at 7.5%, and the target of the Federal Reserve is to reduce it to less than 6.5%. Some concerns regarding possible tapering have been raised in recent periods but in my opinion, this increase in interest rates will occur after at least two years. Considering these notions of economic recovery, I aim to evaluate Robert Half International (RHI) as a prospective investment opportunity.
Robert Half is the first and the largest staffing firm, which focuses primarily in the accounting and finance sector, with some exposure to other growing sectors as well. In FY02, the company introduced the risk consulting and internal audit business called Protiviti. Robert Half has operations in more than 20 countries, but currently almost 75% of the company's revenues can be traced back to the US. This proportion is decreasing however, as the company aims to tap into the opportunities in emerging markets. In terms of business segments, approximately 80% of the company's revenues come from temporary and consulting segments as Protiviti and Permanent Placement remain the smaller segments for the overall business. The business strategy of the company is based on addressing the increasingly specialized needs of the clients as the market follows a continuous process of transformation.
Growth Segments of Industry
The Staffing Industry Analysts (SIA) conducted a review of the position of staffing companies and the different segments of operations. The report identified the growing and the recovering portions of the staffing industry.
Source: Staffing Industry Analysts Report
The above table shows the growth comparison of the industry segments and identifies the growing and recovering segments. Robert Half's exposure is primarily based on the finance and accounting segment, which is showing a projected growth of 89%. At the same time, Robert Half also has exposure to some of the growing segments such as IT staffing.
Sensitivity to Macroeconomic Conditions and Industry Position
The macroeconomic indicators provide a sizable insight regarding the performance of the staffing industry. With regards to Robert Half, we can judge the relevance by comparing the trends of the company's revenues and the US unemployment rate.
Data Source: US Bureau of Labor Statistics and Morningstar
The above chart shows the inverse relationship between the trends projected by the unemployment rate of the US and the revenues generated by the company. As mentioned above, the unemployment target currently stands at 6.5%, which means that the company has a strong opportunity for revenue growth in the near future. At the same time, the improvement in employment conditions will assist the whole industry. Therefore, it is also vital for analysis purposes to consider the company's position against its competitors.
Data Source: Yahoo Finance
The above table shows the figures for the financial standing of Robert Half and its competitors, ManpowerGroup and Randstad. The table clearly points out that the company is operating at substantially strong profit margins as compared to competitors, and over the last three years, these margins have increased. This has resulted in a substantial net income growth as the company provides its services at attractive prices.
Robert Half has the potential to become the investors' favorite due to a number of factors. These include the company's growth prospects, increased dividends and buybacks, and the financial strength and stability of the company. Robert Half operates at virtually zero debt, thereby strengthening its stability.
The above chart shows the company's dividends and its current ratio since the beginning of FY09. The chart emphasizes the consistency of increase in dividends, which has been occurring for a long period of time. Simultaneously, the company's liquidity position has been kept at robust levels as well. The most important indicator of the company's strength is that it has maintained its strong cash flows and conducted a consistent share count reduction as well. Over the last five years, the company's share count has reduced by approximately 15%.
The above chart shows the company's PEG ratio and earnings yield since the beginning of FY11. The chart initially points towards an increasing trend for both the earnings yield and PEG ratio, which currently stand at 4.49% and 0.79 respectively. These figures show that the company is substantially well priced if we consider its growth potential over the coming years.
The nature of the business in the staffing industry makes it highly likely to grow in times of economic recovery. In this perspective, Robert Half is extremely well positioned to benefit from the economic conditions as the company has exposure to the growing and recovering segments of the industry. At the same time, the high exposure to the US economy will favor the company's outlook. Robert Half's strong financial performance, coupled with its cheap valuation and remarkable growth prospects, provide outstanding potential for profitable investment. Therefore, I propose a buy recommendation for Robert Half.