I have written at length on Monster Worldwide (NASDAQ:MNST), Korn Ferry (NYSE:KFY), and Heidrick & Struggles (NASDAQ:HSII) in the past few months, arguing that the upcoming turmoil in the economy and, eventually, the job markets will reveal the underlying cyclicality of these businesses, resulting in massive decreases in earnings, earnings estimates, and share price.
So far, my thesis has begun to play out nicely with MNST, which has seen pressure in both US and international MEI (a good proxy for business going forward). In the US, MNST has not only seen the MEI fall, but has also seen its pricing fall as well, due primarily to fewer sales to small and medium size businesses, which on average pay more per listing.
This trend is accelerating in the recently announced February numbers, which saw MEI fall 7% YoY. The same deterioration, however, has not been seen in the executive search companies, KFY and HSII in particular.
MNST serves as a broad proxy for the larger employment market. It is not surprising, then, that current weakness in the employment market in the US (and, increasingly, abroad) has and will continue to erode its business. KFY and HSII, however, focus on a very small niche of the job market: that of executives, and higher level management. The market for executives and high level management is driven primarily by the creation of new management jobs and increased turnover in management. Factors that influence these two drivers are tighter markets for talent, increases in poaching from other companies, reductions in promotion from within, business creation, and general economic conditions.
My original thesis was that all the aforementioned factors would be negatively influenced in deteriorating economic conditions. I believe I misjudged a couple of key elements which have delayed but not prevented an eventual drop. These develops include:
1) Continued robust growth abroad, which should begin to slow noticeably as the US drags down international economies with it. Also, keep in mind that most of HSII & KFY's business is from multi-nationals, not country domiciled businesses, which means that many of these businesses country growth plans could be harmed by issues in the US.
2) Increased mandatory turnover as companies (especially financial companies) clear house, firing scapegoats and bringing in fresh blood. This has the effect of increasing demand for HSII & KFY's services. I believe this affect is temporary. Once house is cleared, the impact of decreased turnover should be revealed. In tough economic times, employment opportunities tighten, leading to less voluntary turnover as people are presented with less opportunities to move elsewhere.
3) HSII alluded to strong demand in financial services for risk managers that offset much of its weakness elsewhere. The financial markets turmoil has, it appears at least temporarily, created demand for new management positions. I believe this shock is one time in nature and that, eventually, we should see new job growth at the management level slow noticeably, both domestically and abroad.
MNST should continue to experience pressure to its earnings and stock price nicely mirroring declines in US and abroad job growth. Whether or not these same pressures will eventually hit KFY and HSII remains to be seen, but I for one believe they will.
Disclosure: Author is short MNST, KFY, and HSII.