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As I indicated I was close to doing when I wrote about "discovering" Barrett Business Services (NASDAQ:BBSI) last week, I became an owner of the shares. I picked up a small entry position in BBSI at $23.02 today.

So why did I decide to buy in? I looked further into the risks, and decided the valuation and growth potential outweighed them in the long term.

And risks there certainly are; this is a staffing and HR outsourcing company, so if hiring falls apart their sales will certainly dip. On the flip side, they have a huge load of cash and a large portion of their sales are in annual PEO contracts, which are steadier than the temporary staffing business.

There are some other significant risks as well; the lion's share of their business is in California right now (though their focus on growth and possible acquisitions is partly a way to diversify away from the state), so any problems with the big hirers in CA would be problems for Barrett. In particular, they have had some recent dips in their sales that were due to declines in demand for agricultural workers in specific areas, and they do supply a lot of workers to the potentially volatile construction market.
That said, in an industry that is largely fragmented and made up of small local and regional companies (BBSI is in the top 15 or 20 companies nationwide, though they're much smaller than the biggest firms like Manpower and Administaff), BBSI has an excellent track record of steady growth in sales and earnings, and an admirable cash hoard and focus on growing from a regional to a national provider.

And the other significant risk is also related to California - with a lot of their clients there seeing the value of BBSI's services largely as a provider of insurance for workers compensation, changes in the workers comp laws there might have an impact. The company is certainly aware of this, however, and they have focused on forming tighter relationships with their clients that emphasize the value BBSI can provide in outsourcing HR functions over and above just helping with the touchy workers compensation insurance issues.

So, there are plenty of risks that I've discounted as being relatively insignificant in the long term, though a rise in unemployment or a drop in economic growth out West would certainly create short term sales dips for the company. Against their track record of solid growth, high insider ownership, great performance numbers (gross and operating margins blow away their large competitors), and their pile of cash on hand, I'm willing to take on those risks.

As an aside, I also had my interest piqued in Manpower (NYSE:MAN) after researching the industry for this purchase; with their strong international presence, they might be able to ride any downturn in the national employment picture more easily, though as a much larger company they're less interesting and may have less potential for long term growth. I may revisit MAN in the future. And this is despite the fact that the temp job they got me after graduating from college eons ago was moving boxes around a basement ... I don't hold a grudge.

BBSI vs. MAN 1-yr chart

bbsi chart2

Source: Buying into Barrett Business Services