The Wall Street Transcript recently interviewed William Blair & Company's Timothy McHugh. McHugh is a business services analyst specializing in the consulting and human capital services sectors. Key excerpts follow:
TWST: Who is at the top of your list at this point?
Mr. McHugh: In the temporary staffing space, I think the highest quality firm is Robert Half International (RHI). In the executive search space, I like Heidrick & Struggles. Those two firms are very well run, have strong market shares in their respective industries, have excellent balance sheets, generate strong cash flow, and should benefit from both secular trends and an eventual cyclical upswing in demand for their services during the next two to three years.
TWST: Why do you single Robert Half out?
Mr. McHugh: They are the dominant firm in the US and internationally for accounting and financial services professionals. From the demand side, there has been a secular increase in demand for accounting and finance professionals during the last five years as regulatory scrutiny and federal legislation has forced corporations to reinvest in the amount of financial controls and systems that they have in place. I think that trend continues and will be supplemented during the next few years by a likely switch toward international accounting standards, which will again strain the accounting resources of corporations and most likely force them to turn to temporary staffing professionals. From the delivery side of the business, the company is run by a tenured management team that has led the company's growth throughout the last few decades. They have a strong balance sheet, some of the highest profit margins in the industry, and excellent cash flow.
TWST: Are their good cash flows and strong balance sheet positioning them for acquisitions? What are they doing with the excess cash?
Mr. McHugh: They are always opportunistically looking at deals, particularly in these times. But the company also is actively repurchasing their stock right now. Management commented on the last conference call that they view their own stock as the best acquisition they can make at the present time.
TWST: What's the story on Heidrick & Struggles (HSII) at this juncture?
Mr. McHugh: Heidrick & Struggles remains one of the premier executive search firms in the world. I think they will benefit during the next few years from the retirement of the baby boomer generation, which is going to put a strain on senior level professionals. In addition, increased job turnover, particularly at the C-suite level, is driving more demand for their services. As I mentioned before, I think the increasingly global nature of corporations and talent is also supporting demand for their services.
In addition, increased scrutiny of the Boards of Directors is making it more likely that Boards and corporations turn toward a brand that they know when it comes to executive search. Finally, I think the company has opportunities to expand further into new areas such as leadership consulting. Therefore, I believe the longer-term growth outlook remains attractive. On a short-term basis, I also think the company's business is holding up better than most people anticipated and better than was reflected during the last economic downturn.
TWST: What's the risk in these two? Is it just timing because of the uncertainty of the economy?
Mr. McHugh: When you are talking about these two firms, you are talking about industry leaders that I think are going to continue to gain market share. So your biggest risk here, at this point, is really that the demand environment remains weaker for longer than people anticipate. At the present moment, I think expectations about the demand environment are fairly low, so I think your downside on a one- to two-year basis is fairly limited at this point.