Barrett Business Services: A Good Mix

| About: Barrett Business (BBSI)

I've recently had a new company come to my attention, and thought I'd share some of my thoughts on it. The company is Barrett Business Services (NASDAQ:BBSI), a staffing and HR company that works in several Western states and in MD, NC and DE, with most of their business being in California.

The company first caught my eye because it's cash rich and debt free, has had very consistent sales growth and solid earnings growth, and it just started paying a dividend in the most recent quarter.

I think it's often a really good sign when a small cap company with growth potential starts paying a dividend, as it indicates that management has a lot of faith in the company's prospects. If you own a company as they begin paying dividends, you have the chance to participate in a rosy future of dividend growth if business performance is solid (the declared dividend now is 28 cents/year, less than 1-1/2 percent on the recent share price of about $23, so not a big deal yet).

And as a further good sign, the CEO appears to have a lot of skin in the game (and a lot of experience in the business). William Sheretz and Nancy Sheretz, whom I assume is his wife, together own more than 30% of the outstanding shares. High insider ownership and a dividend in a small cap stock that has excellent and consistent sales and earnings growth? That sounds to me like it's worth more than a market multiple, but right now, if you believe the two analysts who cover the company, the shares are going for a forward PE of just about 14. And that's not taking into account the 20%+ of their market cap that they hold in cash right now.

The Business Mix
bbsi logo
Though I'm still learning about their industry, I also like the business mix that BBSI has; they provide three major services: HR management (or PEO, professional employer organization services), temporary staffing, and permanent staffing. Of these, temp staffing and permanent staffing are pretty self explanatory, they provide temps and handle recruitment and hiring of permanent employees for their clients, like any staffing company you've ever heard of. Those are pretty variable businesses; sometimes temp workers are in much higher demand than others, and we all know that sometimes jobs are more plentiful than others. The HR management/PEO portion of the business, however, is very steady, growing and interesting.

HR management essentially means that you can outsource virtually your entire HR office to BBSI. They can handle employee recruitment and retention and firing, safety training, employee benefits and all payroll paperwork, and even workers compensation issues (a big deal for some companies, especially in California). This can be a desperately needed service for smallish companies, where owners or managers can spend a huge portion of their time just managing employee paperwork and related issues.

If you're interested in the business, there are plenty of good resources for learning more. From a company perspective, there's a good article on finding a PEO at, and a more cautious article about outsourcing HR from the Rockford Register. There's an association, too (of course), with good info on their website at

The Competition

Now, BBSI isn't the only company that does this; there are literally hundreds of them, mostly tiny and local (for a long list of just those that are active in California click here), but I like that they're a small but significant regional player, and a very profitable one, with a good history of consistently growing sales (weekly sales have gone from about $3 million in 2003 to about $22 million recently in a nearly straight line, and annual revenues have been growing at about a 40% clip for several years). And I like that they have a mind to consolidate the industry as a buyer, with one acquisition in 2006 and the potential to use their big cash hoard (more than $5 a share) to make strategic acquisitions in the coming years to help spur additional growth.

All this while the company has said they've still been able to pick and choose among prospective clients to keep their risk low (as essentially a co-employer with their PEO clients, BBSI is the one that takes out the workers comp insurance. So, for example, they wouldn't typically want to contract for PEO services with a roofing company).

After my first run through on the company's materials and reports, this looks like a promising company with very steady and growing sales. PEO contracts generally run on annual cycles, and BBSI has a very high (90%) renewal rate. The hassle of changing companies in this business is pretty substantial, and the hassle of taking the work back yourself is worse still. This part of the business has been growing faster than the traditional staffing business for Barrett, and now makes up close to half of revenues.

As anyone with employees knows, finding good ones, hiring them, and managing the burden of regulatory oversight, benefits management, and payroll paperwork is a nightmare. I think a company that can do this for you, and also has a huge green field of potential growth in a very fragmented industry going for it, is a pretty compelling investment idea.

I don't own BBSI yet, but I've almost talked myself into buying shares just by re-reading what I wrote above. I'll let you know what else I learn about the company, and whether I make a purchase. My primary remaining concern is competition, since Barrett is sort of in the middle between the huge national players like Administaff and the tiny local companies that may serve just one town or region, or even a single company, so I need to understand better how they maintain their niche in the market.

BBSI 1-yr chart


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