Barrett Business Services: Jumping in Ahead of Earnings

| About: Barrett Business (BBSI)

Barrett Business Services, Inc. (NASDAQ:BBSI) offers human resource management services to assist small and medium-sized businesses manage the costs and complexities of employment-related issues. The stock was highly touted by Motley Fool at the beginning of the year as a value play.

However, the stock has significantly underperformed the market this year due to disappointing earnings results (.01/share earnings for the first quarter, down from .15/share the previous year despite $5.6m growth in revenues). In addition, the CFO resigned on May 07, 2008, citing 'personal reasons'. It closed at $11.63 on Friday.

Here is a highlight from the previous quarter's earnings, with management stating demand for staffing services will continue to reflect general economic conditions:

Net income for the first quarter of 2008 amounted to $91,000, a decline of 94.7% or $1.6 million from net income of $1.7 million for the first quarter of 2007. The decline for the first quarter of 2008 was primarily due to lower gross margin dollars as a result of higher direct payroll costs and higher workers' compensation expense and to higher selling, general and administrative expenses. Diluted earnings per share for the first quarter of 2008 were $.01 compared to $.15 for the comparable 2007 period.

Revenues for the first quarter of 2008 totaled $66.2 million, an increase of approximately $5.6 million or 9.3%, which reflects an increase in the Company's staffing services revenue, and a slight decrease in PEO [professional employer organization] service fee revenue. Staffing services revenue increased approximately $7.8 million or 27.9% over the comparable 2007 quarter primarily due to the three acquisitions made since July 2007. On a comparable branch office basis, i.e. without the effect of the three acquisitions, staffing services revenues for the first quarter declined 11.5% or approximately $3.2 million from the comparable quarter in 2007. The decline in staffing services revenue was attributable to general economic conditions affecting our customers' business.

Management expects demand for the Company's staffing services will continue to reflect overall economic conditions in its market areas. PEO service fee revenue decreased approximately $2.2 million or 6.7% from the 2007 first quarter primarily due to a decline in business with existing PEO customers, offset in part by the net effect from the addition of new customers. General economic conditions continue to adversely affect the growth of our existing PEO customer base.

The stock reports earnings tomorrow, July 29th and I will be watching closely. It currently yields 2.72%,, and sports a market cap of just $128m,. It is trading near its 52 week low of $10.38 and I believe the upcoming earnings report could help either a) stoke fears that the company is unable to rebound in a challening economy or b) show that the most recent quarterly earnings was just a blip on an otherwise impressive run that began in 2003.

The company also has seen some recent insider purchases and stock buybacks. For the 1st quarter, the company purchased 97.4k shares, or approximately $1.5m in stock at an average price of $15.81/share. At the end of the 1st quarter, 743k shares were still authorized to be repurchased. Since April 28th, 4 directors have made open market purchases of approximately 4300 shares ranging in prices from $11.98-$12.68.

Below are some key ratios, most noted is the low Price/book and Price/sales ratio, no debt, and cash flow ( in addition to the dividend). The most obvious negative is the negative earnings growth reported in the 1st quarter and the impact of the general economy on demand for the company's services:

Growth Rates % Company Industry S&P 500
Sales (Qtr vs. Year Ago Qtr.) 9.3 9.00 12.4
Net Income (Qtr vs. year Ago Qtr.) -94.70 3.8 12.4
Sales (5 year annual average) 21.48 14.24 13.84
Price Ratios Company Industry S&P 500
Current P/E 8.9 17.2 20.4
Price/Sales .43 2.73 2.14
Price/Book Value 1.15 4.77 4.81
Price/Cash Flow 7.7 13.20 13.10
Financial Condition Company Industry S&P 500
Debt/Equity Ratio 0.0 .12 1.48
Current Ratio 2.0 1.4 1.1
Quick Ratio 2.0 1.4 0.9
Book Value/Share 10.09 9.22 20.33

Disclosure: Author holds a long position in BBSI