By Vishnu Lekraj
We see positive private sector growth in the new year -- and one opportunity in particular.
The employment market has been in a weakened state not seen since the early 1980s. Nonfarm job growth has been lackluster, and the unemployment rate remains close to 10%. However, several positive factors have filtered through the system over the last quarter, and we're confident private sector growth will be on the positive side from this point forward.
Along with improving government employment reports, many employment services firms have reported solid results over the last quarter. The outlooks given by many management teams were also highly encouraging as the probability of a double-dip scenario slowly fades. We believe moderate near-term growth coupled with a long-term secular trend toward greater employment services usage by businesses will be highly beneficial to most of the employment services firms we currently cover. Additionally, we believe investors are presented with an advantageous opportunity in narrow-moat healthcare staffer AMN Healthcare (AHS).
Rebound for Temporary Employment Services Despite Anemic Job Growth
Staffing firms have done extremely well over the last few quarters as businesses play it cautious by using temporary workers during the recovery. Additionally, we also believe a secular trend has developed where businesses will use temporary labor at a greater rate over the long term in order to build a more flexible and efficient workforce. These trends have been especially positive for the narrow-moat staffing players. Firms such as Manpower (NYSE:MAN) and Trueblue (NYSE:TBI), and Robert Half (NYSE:RHI) have reported double-digit revenue increases and profit expansion. We have no doubt the narrow moat and dominant staffing networks of these firms have helped them thrive during this recovery.
One theme that surprised us has been the rebound for permanent placement services. Permanent placement usually lags its temporary staffing counterpart during economic recoveries, so this is an abnormal result. We believe the divergence is related to two factors. First, some businesses decreased their workforces to such a low level that any pickup in business activity has required more immediate hiring of permanent staff. Additionally, we believe that certain businesses have taken advantage of the quality pool of talent currently looking for work.
Project Staffing Finally Shows Some Life
One specific segment of the staffing subsector we would like to highlight is project staffing. Business spending has been anemic since the beginning of the most recent recession. Businesses are now flush with cash but have been delaying most discretionary spending until the current economic recovery fully establishes itself. This has affected project staffers such as Resources Global (NASDAQ:RECN) dramatically. The firm's revenue fell 41% from fiscal 2008 to fiscal 2010 and its operating margins compressed to 0% from 10% over this same two-year period. However, the firm recently posted some strong results for its first fiscal quarter of 2011 driven by a solid increase in project activity. Additionally, this improvement seems to be accelerating. Over the first four weeks of the second fiscal quarter (the month of September), aggregate revenue has increased 11% to $40.3 million on a year-over-year basis.
Needless to say, this is a major positive and suggests many businesses are now willing to increase spending, albeit at a cautious level. We believe there is major potential for Resources Global as many projects that may have been discretionary are now becoming necessary. Additionally, we like Resources Global's unique business model and believe the firm has built a narrow economic moat through a top-tier staffing network.
On the other side of the spectrum have been the health-care staffers, which have suffered greatly over the last year. Usually health-care staffing holds up better than most other staffing subsectors during an economic downturn; however, demand for healthcare workers has been hit especially hard in the most recent recession. The sector has not lost an unusually large percentage of workers, but the combination of slowing worker demand and low turnover has been disastrous for health-care staffing.
Opportunity in the HealthCare Staffing Market
AMN Healthcare and Cross Country Healthcare (NASDAQ:CCRN) both saw their revenue decrease 40% and 20%, respectively, over 2009. While 2010 has not been robust (we still expect an 18% decline in revenue for both this year), we have seen a mild improvement in health-care employment metrics over the last quarter. While we still believe health-care job growth will be slow over the near term, long-term trends point to a ripe operating environment for AMN and Cross Country. Therefore, investors are currently presented with an advantageous situation where they are able to benefit from the growing demand for health-care services. Both stocks are materially undervalued, in our opinion, but AMN especially so -- it currently trades at approximately 40% to our fair value estimate. Augmenting the firm's long-term tailwinds is its narrow economic moat, derived from a stellar staffing network.
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