Comparing America's 3 Largest Staffing And Outsourcing Services

Includes: MAN, PAYX, RHI
by: Joseph Cafariello


The Staffing & Outsourcing Services industry is expected to outperform the S&P broader market significantly this and next quarters, substantially in 2015, and significantly beyond.

Mean and high targets for the 3 largest U.S. Staffing & Outsourcing Services companies - Paychex, Robert Half International, ManpowerGroup - range from 6% below to 52% above current prices.

Find out which among Paychex, RHI and Manpower offers the best stock performance and investment value.

*All data are as of the close of Friday, January 16, 2015. Emphasis is on company fundamentals and financial data rather than commentary.

There are many industries that have general trends running through them like an ocean breeze influencing all ships along a general direction and at a common clip. Then there are industries like Staffing & Outsourcing Services, which seem not to have any industry-specific trend acting within them, and whose ships are pretty much left to run under their own power.

In the simplest of descriptions:

"Staffing and Outsourcing Services companies serve as intermediaries in providing contract, temporary, as well as permanent staff to clients with specific employment requirements. These companies are also known to provide payroll and human resources outsourcing solutions for small and medium-sized businesses."

But prevailing trends in the industry are as sporadic as the employment opportunities of its members.

For instance, when a general breeze did start to blow through the industry in the early part of the economic recovery as America's companies had begun rehiring, the three largest U.S. companies in the Staffing & Outsourcing Service industry - Paychex, Inc. (NASDAQ:PAYX), Robert Half International Inc. (NYSE:RHI), and ManpowerGroup Inc. (NYSE:MAN) - benefited greatly from the growing demand for their hiring services. Hence the surges in their stock performances from early 2009 until early 2011, as graphed below.

But even then, only RHI and Manpower seemed to catch the wind in their sails while Paychex missed out. Moreover, what little trend there was running through the industry quickly dissipated from late 2011 to the start of 2013, as all three companies again underperformed the broader market.

By this time, companies were confident enough in their growth to shift the task of hiring back onto their own internal human resources departments, relying less and less on the agencies.

And so it has been right up to today, with still no general trend in the industry as all three companies have performed markedly differently - with Paychex [beige] at the bottom of the heap with gains of 130%, RHI [blue] at the top with gains of 295%, and Manpower [purple] somewhere in between with gains of 180%.

It looks like this is one industry that needs to be sorted through on a case-by-case basis.


Zooming in a little closer, therefore, the three largest U.S. companies in the space are expected to continue their split performance, as tabled below where green indicates outperformance while yellow denotes underperformance.

Paychex is still expected to underperform in earnings growth relative to its two competitors and the broader market as well.

RHI is still seen sailing along at the most rapid clip, its earnings expected to grow at a very consistent rate ranging from +15.75% to +20.80% as far as the crow's nest can see.

And Manpower, for its part, is still seen meandering between its two competitors, beating the S&P's average earnings growth rate for the most part, with the exception of next quarter.

Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?

Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.

A) Financial Comparisons

• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.

• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.

In the most recently reported quarter, RHI delivered the greatest revenue growth year over year, where Manpower delivered the greatest earnings growth. At the low end of the scale, Manpower and Paychex split the least trailing growth rates between them.

• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs, plus all other costs, including debt, interest, taxes and depreciation.

Of our three contestants, Paychex operated with the widest profit and operating margins by a considerable degree, where Manpower contended with the narrowest.

• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.

For their managerial performance, RHI's management team delivered the greatest returns on assets, Paychex's team delivered the greatest on equity while Manpower's team delivered the least returns on both.

• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.

Of the three companies here compared, Manpower provides common stockholders with the greatest diluted earnings per share gain as a percentage of its current share price while RHI's DEPS over current stock price is the lowest.

• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value comes under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.

Among our three combatants, Manpower's stock is the cheapest relative to forward earnings, company book value and 5-year PEG while Paychex's stock is the most overvalued to all three ratios.

B) Estimates and Analyst Recommendations

Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.

• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.

Of our three specimens, Manpower offers the highest percentage of earnings over current stock price for all time periods. At the low end of the scale, RHI offers the lowest percentages for the current reporting year (Q1-Q4 2014) while Paychex offers the lowest for all remaining periods.

• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.

For earnings growth, Manpower offers the greatest growth in the current reporting year while RHI offers it for all remaining time periods. At the low end of the spectrum, Manpower offers the least growth next quarter where Paychex offers it for all remaining periods.

• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.

For their high, mean and low price targets over the coming 12 months, analysts believe Manpower's stock offers the greatest upside potential and least downside risk, while Paychex's offers the least upside and greatest downside.

It must be noted, however, that Manpower's stock is already trading below its low target. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.

• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up is analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.

Of our three contenders, Manpower and RHI are tied as best recommended, with the tie breaker going to Manpower for having 5 strong buy and 5 buy recommendations representing a combined two-thirds of its 15 analysts, followed by RHI with 4 strong buy and 6 buy ratings also representing two-thirds of its 15 analysts, and lastly by Paychex with 2 strong buy and 1 buy recommendations representing 12.50% of its 24 analysts.

C) Rankings

Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.

In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.

The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.

And the winner is… Manpower with a hard-earned victory, outperforming in 17 metrics and underperforming in 8 for a net score of +9, with RHI bucking for a promotion, outperforming in 8 metrics and underperforming in 3 for a net score of +5, and Paychex caught sleeping on the job, outperforming in 6 metrics and underperforming in 20 for a net score of -14.

Where the Staffing & Outsourcing Services industry is expected to outperform the S&P broader market significantly this and next quarters, substantially in 2015, and significantly beyond, the three largest U.S. companies in the space are expected to split perform in earnings growth much as they have in stock performance, with Paychex growing the slowest, RHI growing at full speed, and Manpower tacking in between the two.

Yet after taking all company fundamentals into account, ManpowerGroup Inc. employs the superior financials, given its lowest stock price ratios, highest cash, revenue and EBITDA over market cap, highest diluted earnings over current stock price, highest trailing earnings growth, highest future earnings over current stock price for all periods, highest future earnings growth for the current reporting year, best price targets, and most analyst strong buy recommendations - comfortably winning the Staffing & Outsourcing Services industry competition.