Seeking Alpha
Long/short equity, research analyst, portfolio strategy, newsletter provider
Profile| Send Message| ()  

by David Urani

The past couple weeks of employment data have made me do a double-take. By the looks of it the jobs market, after roughly a year of stagnation, looks like it may finally be turning the corner. 2010 has been frustrating, considering that every time there were hints of a rise in employment, the next set of data came around to disappoint again. Initial jobless claims essentially held lock-step in the mid-400,000 range since November 2009 with amazingly little variance. All the while the unemployment rate remained right at the high 9% to 10% range. Now though, things are changing and Friday's employment report should show more of that progress.

Let's start with initial jobless claims, which in the week ended November 20 hit a two and a half year low of 407,000. The initial claims data does tend to be volume, but finally we are seeing signs of a true downtrend in the index, as seen by the four week average also touching a more-than two year low. Claims initially began to weaken in the latter part of October when they hit 437,000 on the week of the 23rd; we suspected there might have been another anomaly in the data when the following week it hit 459,000 but in the following three weeks they held below 450,000.

click to enlarge

In much the same fashion, nationwide employment according to the BLS was generally recording job losses since January 2008, except for large amounts of temporary census hiring earlier this year. However, October showed a 151,000 increase in nonfarm employment which was perhaps the first "true" triple digit increase since late 2007. That brings us to Wednesday's ADP report on private sector employment which showed a 93,000 job increase in November, adding to the 82,000 gain in October.

click to enlarge

Case in Point: Robert Half International (RHI)

One of the bellwethers of the job market, Robert Half provides staffing solutions, largely in white collar jobs. On October 20, Robert Half International reported its fiscal third quarter 2010 earnings results. The Company recorded revenue of $817.3 million, representing an increase of 12.6% year over year and an increase of 6.3% sequentially. The result exceeded the $791.3 million consensus estimate. Sales were higher both year-over-year and sequentially in all segments. The Company's two largest segments, Accountemps and Office Team, grew sales by 8.9% and 21.6%, respectively compared to the third quarter of 2009. On a sequential basis, sales in all segments increased in the mid-single digits except for RH Finance & Accounting, which grew by just 1.9%.

On the bottom line, Robert Half reported net income of 20.1 million, or $0.14 per share. The result exceeded the $0.13 per share consensus estimate. Gross margin edged higher by 10 basis points while SG&A expenses fell by 150 basis points as a percentage of revenue. On a sequential basis, operating profit in the temp segment increased by 35.6% while permanent was down slightly and Protiviti (the Company's risk management division) reported a breakeven quarter after a $6.8 million loss in the previous quarter.

For its third quarter, Robert Half finally seemed to exhibit stable sales growth, after a long spell of softness throughout the "Great Recession." We were pleased to see universal growth across all segments on both year over year and sequential bases. Consequentially, the Company's sales came in nicely above expectations. Even Protiviti, which has been a drag on earnings for some time now reported a breakeven quarter on income, and it seems as though it can turn profits from here on out. This of course is under the assumption that sales continue to grow. On the other hand, Finance & Accounting was the laggard, increasing sales modestly from the previous quarter (although still up 33.1% year over year). We have seen reports of softness in the financial labor market and therefore do not expect a strong showing in the fourth quarter either for the segment. We expect Accountemps to continue to perform relatively strong as temporary staffing is still more desirable than permanent placements for employers.

On the expenses side, gross margin continued to firm up, which can be largely attributed to an improving mix of permanent placements. SG&A expenses came down significantly as a percentage of revenue, with the sequential benefit being attributed to the loss of litigation costs, while year over year improvements were driven by increased efficiency through higher revenue. Nevertheless, the SG&A result was somewhat surprising considering the Company began to hire employees to catch up with demand. Looking ahead, it appears likely that the Company will continue to add to headcount with demand solidifying.

Until now, we were looking for evidence that business had firmed up and was ready to grow. Given the all-around better performance during the quarter and positive year over year and quarter to quarter comparisons across the board, we are more optimistic on the stock. We still see risk in the form of a stagnant labor market and a potential decrease in Finance employment, but we now see Robert Half's overall market inching higher rather than flat or declining.

Source: Employment on the Mend