Barrett Business Services: Jumping in Ahead of Earnings

Barrett Business Services, Inc. (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

Comments

[DaveinHacke...:]

"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."

You may want to listen to Barrett's last conference call again. Barrett's CEO is a straight-shooter, and he was pretty clear about the effect of the California economy on the company. More than half of the company's business has been from California, and as you might be aware, California's economy has been hammered by the housing bust. Barrett's CEO estimated on the last conference call that the unemployment rate in CA was 7.5%.

I wrote an "Anatomy of a Mistake" post about how I bought BBSI at the wrong time on site, if you want to check it out.

2008 Jul 28 09:22 AM

[TRUSSO:]

I like the sector, the staffing and PEO outsourcing industry has been growing steadily for the last ten years. Other PEO and staffing companies can be found at peobizz.com.

2008 Jul 28 10:34 AM

[Scott's Inv...:]

Yes, I agree that macro conditions will continue to challenge the company as they have stated. The headline is a little deceptive, I'm not jumping in prior to earnings (and have no position in BBSI) but rather I'm watching closely to see how big of an impact macro conditions will have on the company going forward. The balance sheet is solid and the book value and no debt give it some downside protection, but if earnings continue to drop at alarming rates, then there will be more downside. Tomorrow should be interesting!

2008 Jul 28 01:06 PM

[Steve Alexa...:]

The company holds nearly half it's market cap in cash with no debt - enterprise value is only a bit above 75 million. With 56m in cash and no debt, they can survive a downturn for some time. California is a challenge, no doubt. They've been trying to expand their geographical base with acquisitions in Arizona, Colorado, and Utah.

The trick is surviving the downturn, which the company is well positioned to do. Try a DFCF scenario - the stock is 20% undervalued today assuming the company never increases free cash flow for 10 years!

Steve
magicdiligence.com

2008 Jul 28 03:01 PM

[DaveinHacke...:]

Wow, those earnings were quite a surprise. Looking forward to the conference call.

2008 Jul 30 11:49 AM