- Company has delivered on its commitment to grow revenues.
- Growth of Accounts Receivables continues to outpace revenue growth.
- Reduction in SGA demonstrates good management of bottom line.
- Dividend yield continues to lag.
The most recent KFRC filing demonstrates a good quarter for the company, and management should receive credit where it is due. Core revenue performance was higher than expected, although the strength was primarily based on lowered guidance due to the winter storms in the Northeast US. In other words, the company reported a modestly positive quarter relative to lowered expectations.
On the positive side, the firm has continued to reduce their SGA as a percentage of sales - a welcome sign - with the quarterly ratio coming in at 25.6% versus last year's 28.5%. For staffing companies, the ability to reduce SGA while increasing revenues is a good indicator, and one can attribute this improved operating margin to the corporate streamlining which was announced in prior quarters. One should keep an eye on this ratio moving forward as an indicator of management's continued cost discipline.
On the negative side, the base profitability lagged from last year, with Tech Flex staffing gross profit falling from 27% to 26.5%, and total Flex gross profit falling from 28.3% to 27.5%. A falling gross profit is not a good sign, as it may indicate a tightening in the labor market, requiring the firm to "pay up" to retain talent. Moreover, pressure on the gross profit will make reductions in SGA all the more relevant for the total bottom line. Despite the reduced gross profit percentage, the firm managed to raise their EBITDA profit percentage from 4.2% to 4.5%. Granted, this is still too low, but at least the direction is appropriate. The minimum acceptable EBITDA percentage is 5%, and 6% is an appropriate target rate for an outperformer.
As seen in prior quarters, a nagging increase in Accounts Receivable also continued into the first quarter, with the quarterly growth in Accounts Receivable of 4.9% handily outpacing quarterly revenue growth of 0.8%. In a services company like KForce, one can expect cash flows to be compressed by the presence of new orders because sales collections lag by 45-60 days from the initial sale. When sales are increasing, the Accounts Receivable will also grow. However, one would not expect the increase in Accounts Receivable to significantly outpace sales growth, which seems to have been the case for a few quarters. One should continue to be vigilant on this issue, as it may be a result of poor collections practices, or worse, a breakdown in client satisfaction. There have, to date, been no indications that this is the case, but the growth of the accounts is concerning.
Share Price Performance
As seen in the following chart, the share price reacted well to the quarterly announcement, then cooled back off over the ensuing weeks. The trading range of 18 - 22 seems to have tightened to 20-22, with support being seen slightly above 20 several times in the past few months. However, the range is still in tact, and the stock is currently at the upper bound of the trading range - indicating a short-term selling opportunity, or at least a neutral stance.
The Company declared a $0.10 quarterly dividend, in line with expectations, but still terribly insufficient given the seasoned nature of the company. The current annual yield of 1.8% is not impressive, and would ideally be 3% or greater, especially since there are no demands for cash flows other than management's recent attempts to reduce the total shares outstanding via debt issuance.
KFRC seems to be executing well in the current environment, and their industry is experiencing strong demand. The quarterly report shows some plusses and minuses, but the overall operating performance has been acceptable. I am removing my negative bias on the firm, but remain neutral on the long-term investment prospect until the firm demonstrates a consistently increasing dividend payout ratio.