Stars and Dogs In The Recruiting Category (ADO, RHI, MNST, LRW, KELYA)

Improving labor conditions should bode well for job-enabling firms as well as recruiting/staffing services. Below is a quick look at some of the more prominent names in this competitive, fragmented category.

Adecco SA (ADO) : As a veritable leader among temp staffers, Adecco has most Fortune 100 companies as clients -- its size mustn't be overlooked. But its recent focus on profitability/margin expansion could leave revenue numbers gasping for air. Growth will depend on new markets, which won't be easy precisely because Adecco's footprint can already be found just about everywhere. Right now, debt accounts for nearly 40% of total capitalization, something we feel could be improved. We don't see any near term catalysts, and neither does the Street -- there is only one buy rating among analysts.

Robert Half International Inc. (RHI): We believe Robert Half has an unassailable reputation in the professional staffing category. It focuses on higher end segments like finance, accounting, and information technology, all of which are in desperate need of temporary workers. We believe Robert Half has a sharp eye for acquisition targets, using the new businesses it buys to widen its purview and extend its brand. Half has one of the best operating margins stories in the industry, as well as a rock solid balance sheet. Free cash flow accounts for over 5% of sales, which we always like to see.

Monster Worldwide (MNST): Monster.com is the leader in the online job recruiting space. Heavy marketing has created a profitable business centered around a strong brand and the network effects principle (more users = greater utility). Because online recruiting is expected to grow at an annual 20% clip until 2008, Monster may be in the sweet spot. The firm's already posted some terrific ROIC numbers amid heavy competition from newspapers and rival job search engines like Careerbuilder.com. If Monster continues to scale, we don't see its competitive advantage eroding anytime soon. Insiders own 15% of the stock and the balance sheet is squeaky clean. If there was one thing we had to disapprove of, it'd be Monster's refusal to expense stock options. Other than that, Monster's a business we'd like to own should shares ever tumble without cause.

Labor Ready (LRW): Need some day labor ASAP? Look no further than Labor Ready, a differentiated service provider in the temporary services market. Labor ready gets workers on short notices and targets smaller cities where it can service customers looking for unskilled manual labor to suit commercial construction needs. Because Labor Ready is levered to the housing sector, interest rates could adversely impact its revenue story. Nevertheless, we think Labor Ready controls a profitable niche and we applaud its debt-free capital structure. With the stock currently trading at 20x earnings (the industry trades at 30x), now might be a good time to pick up shares. 9 analysts follow the stock; none of them have a sell.

Kelly Services (KELYA) We saved the worst for last. Declining EBITDA and negative free cash flow make this name a sell candidate. Kelly has low pricing power, if any, as well as shoddy operating margins. Management owns 92% of the stock, so if you're a shareholder, don't bother trying to get your voice heard. Management doesn't even let analysts ask questions on conference calls -- what kind of company is this? We view Kelly as a "worst of breed" stock, so it'd have to fall heavily for us to take a second look.

In sum, the more and more people get off the couch, the better these firms may do. This is a preliminary outlook, and as always, we suggest readers do more due diligence before investing. Job stocks are inherently cyclical and a recession could leave all of the aforementioned names coughing in the dust.