I have been Bullish on the Insperity (NSP) story for a while, as reflected in here and most recent here, and that is why when I look at the market's extreme reaction over what seems to be profit booking after the strong stock performance mixed with confusion about gross profit per worksite employee and uneven hiring trends during the quarter, I find it compelling enough to put my opinion out on the name.
The doubts, somewhat overblown as they may be, mostly revolve around the health of the broader labor market and the relatively weak gross profitability, especially the gross profit per worksite employee per month that was down almost 4.9% for the quarter. The concerns are understandable; given a poor labor market can act as a headwind for the broader HR outsourcing industry that includes PEOs (professional employer organization) like Insperity and soft gross profit per worksite employee per month does raise questions on operational productivity.
Looking closely at both the issues, it seems a bit early to get worried. Even with the dip experienced mid-quarter, net hiring remained positive among the company's clients for the full quarter and overtime as the percentage of base pay, a key indicator to gauge the strength of the labor market in the SME market, was down over the last year, but remained over 10%, indicating a need for hiring. The commissions paid by clients to their sales staff, up 5%, remained close to the average levels of last few years. Even though the gross profit increased on an absolute dollar basis, up 9%, the gross profit per worksite employee decline does raise concerns, but part of the decline was due to elevated seasonality visible during the quarter.
Overall, some signs are worth monitoring closely, but hardly worth panicking, especially when the stock is backed by a continuous buyback program, more than 3 million shares during the first half, and dividend, almost $10 million.
The improvement story continues
Barring these hiccups that may be proven temporary, the story of improving execution and decent double-digit top and bottom-line growth continues. Operationally, double-digit growth of average paid worksite employee continues, helped by high client retention, decent attachment rates and an increase in BPAs. Going forward, upgrades in PEO as well as traditional employment platforms and the expected completion of the certification process under the Small Business Efficiency Act should help improve the competitive positioning as well as the profitability of the business.
The improvement in the middle-market segment, which has been historically weak for the company, is continuing, thanks to an increased focus on penetrating the market segment and the cascading down effect of the Affordable Care Act impacting the small-medium market. With the strongest to date pipeline and revenue growth of close to 20%, the middle market segment that constitutes almost 25% of the worksite employees should be a significant growth driver going forward. The sales infrastructure seems ready to help the growth, given the 15% increase in BPAs, leads to sales team growth of more than 80%, upcoming fall sales and retention campaign and hiring of another 25 BPAs by the end of the year.
Trading at 16-17 times forward earnings with double-digit growth expectations, the name continues to trade at a discount to peers like Automatic Data Processing (NASDAQ:ADP), Paychex (NASDAQ:PAYX) and TriNet (NYSE:TNET).
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.