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Praveen Chawla
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I taught my self investing after I got tired of losing money in the hands of so called professionals over the years. I figured its better if I lose my own money. I immigrated to Canada from India in 80's with $10 in my pocket and have not done badly. I am grateful to Canada for giving me the... More
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  • Kelly Services Inc: 40% Upside Likely In 12 - 24 Months In This Cyclical Stock.

    Kelly Services Inc. (KELYA,KELYB) provides workforce solutions to customers in various industries worldwide. The company is a well-known office temp agency and also places temporary professional and technical employees in the fields of creative services, education, legal, health care, scientific staffing, information technology, engineering, and financial staffing. It also offers talent management solutions for its customers, including outsourcing, consulting, recruitment, career transition, and vendor management services. KELYA provides temporary employment for approximately 540,000 employees annually for various customers worldwide.

    The Kelly "A" shares are preferred shares. Preferred shareholders get paid dividends first (if there is limited dividend money to go around). They also have higher claim on the assets of the company (but behind the creditors) if the company goes bankrupt. The "B" shares are common shares. Common shareholders stand in line behind preferred shareholders for dividends and claim on assets. Common shareholders do have voting rights. 88% of "B" shares of the company are owned by Kelly's executive chairman, Terrence Adderley.

    Long term chart indicates Kelly is a perennial underperformer. The stock price has not kept pace with US GDP. Below is chart comparing Kelly's stock price with changes to US GDP and S&P 500since 1990. (Source:

    (click to enlarge)

    The above chart indicates that Kelly is not a stock you can hold for the long term. It's a cyclical trading stock and is currently hitting 52 week lows. On a fundamental basis, Kelly services is looking pretty undervalued at present based on Price to Book and Price to Sales metrics. Company has a pristine balance sheet with no long term debt. Liabilities are mainly accounts receivables. S&P indicates that the earnings will grow 40% in 2015.

    Kelly Services - Key stats

    (Source S&P Capital IQ, Morningstar)

    52-Wk Range

    $26.17- 15.79

    S&P Oper. EPS 2014E


    Market Capitalization(NYSE:B)


    Trailing 12-Month EPS


    S&P Oper. EPS 2015E


    Yield (%)


    S&P 3-Yr. Proj. EPS CAGR(%)


    Trailing 12-Month P/E


    P/E on S&P Oper. EPS 2014E


    Dividend Rate/Share


    Price/Earnings TTM




    Price/Sales TTM


    Rev Growth (3 Yr Avg)


    Net Income Growth (3 Yr Avg)


    Operating Margin % TTM


    Net Margin % TTM






    Long term Debt/Equity


    The following chart compares key valuation figures from the last 15 years. I would like to point out that working capital (current assets - current liabilities) is a large part of Kelly's book value. This is because Kelly needs to pay its employees first and then bill the customer. This means a lot of capital is "trapped" in working capital, thereby reducing Cash Return. In fact Kelly's Cash Return has not been consistent.

    (click to enlarge)

    Source: Data from

    (click to enlarge)

    The following chart provides Kelly's Price /Sales and Price /Book ratio's over the last 10 years. As you can see both ratios' track Kelly's price quite closely. The Price to Earnings ratio and Price to Free Cash Flow ratio on the other hand do not.

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    Investment thesis

    As we can see from the above charts, Kelly is a cyclical stock which should be bought in periods of weakness and sold in periods to strength. Current Kelly is in a period of weakness as indicated by its P/S and P/B ratio's. I have plotted approximate sell target for Kelly (P/S = 0.15 and P/B = 1.1) in the chart below.

    (click to enlarge)

    Given this I have started accumulating Kelly with an objective of unloading in 12 -24 months in the low-20's as revenue and book value rebounds. Given Kelly's strong balance sheet, there is low risk of permanent capital loss. The biggest risk is that you may have to hold the stock for an extended period of time for it to reach the "sell zone". With Kelly you should know when to "hold 'em and when to fold 'em".

    This article was inspired by Dr. Paul Price's excellent analysis of Kelly Services on Kelly Services - A Trader's Dream

    Disclosure: The author is long KELYA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Tags: KELYB, KELYA
    Aug 12 4:54 PM | Link | Comment!
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