Barrett Business Services: Looking Good For The Future

Summary

• BBSI recently posted its FY22 and Q4 FY22 results with increased revenues and net income.
• The stock looks undervalued compared to industry standards.
• They launched three new products which might increase their revenues in FY23.
• I assign a buy rating on BBSI.

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Barrett Business Services (NASDAQ:BBSI) offers business management solutions in the United States. It creates a management platform that combines methods from the human resource outsourcing sector with a knowledge-based strategy from the management consulting sector. They provide expert employer services whereby they enter into a client services agreement to create a co-employment relationship with each client business, taking on responsibility for the client's existing workforce's payroll, workers' compensation coverage, and other administrative duties. In addition, they offer staffing and recruiting services, contract staffing, and direct placement. The company also recently announced their FY22 and Q4 FY22 results. Despite several macroeconomic headwinds, they were able to post solid annual results with increased revenue and net income. In this report, I will analyze its financial performance. I believe they are undervalued and can provide significant returns to their shareholders in the long term. Hence I give a buy rating on BBSI.

Financial Analysis

BBSI recently posted its Q4 FY22 and FY22 results. The revenue for FY22 was $1 billion, a rise of 10.3% compared to FY21. I believe the main reason behind the rise was an increase in total gross billings. Their total gross billings increased by 13% in FY22 compared to FY21. I believe that the rise in total gross billings was primarily caused by an increase in average WSEs and greater average billings per WSE. The net income for FY22 was $47.2 million, a rise of 24.1% compared to FY21.

BBSI's Investor Relations

The revenue for Q4 FY22 was $271.9 million, a rise of 6% compared to Q4 FY21. I think the growth in PEO gross billings was the primary cause of the increase. When compared to Q4 of FY21, their PEO total billings rose by 8% in Q4 of FY22. I believe the primary drivers of PEO's increase in gross billings were its net new client growth and higher average billings per WSE. In Q4 FY22, PEO total billings increased in the East Coast by 15%, Mountain states by 13%, and Southern California by 13% when compared to Q4 FY21. The net income for Q4 FY22 was $11.5 million, a rise of 8.6% compared to Q4 FY21. They reported strong annual and quarterly results despite the challenging market conditions, which is quite impressive and demonstrates how stable the business is under adverse circumstances.

Technical Analysis

Trading View

BBSI is trading at the level of $89.5. In the chart above, we can see that it has a resistance level at $100. The stock attempted to burst through the $100 mark for the first time in 2014, and since then, it has tested it four times without succeeding. It demonstrates the importance of the $100 mark. Since it is currently close to the resistance zone, in my opinion, one should hold off on making any new entries until the stock has broken the level. If it succeeds in breaking through the level, the stock may experience a bull run and offer substantial returns to its shareholders in my view.

Should One Invest In BBSI?

Seeking Alpha

The revenue estimate for FY23 is $1.12 billion, which is 6.6% higher than FY22 revenue. Despite the tight labor market and rising interest rates, the management has provided optimistic revenue guidance, which is a positive sign. I believe they might achieve the revenue targets; I am saying this because the company is expanding its portfolio. They recently launched three new products:

1. BBSI Benefits, through which they will now provide health insurance.
2. BBSI You is a learning management portal with various catalogs like risk and safety and professional skills.
3. BBSI Recruiting.

In addition, they are entering a new market with their asset-light model. I believe these three products and expansion in new markets will help increase its revenues and income in FY23.

Talking about the valuation part. I will use two valuation metrics to judge its valuation. The first ratio is the P/E ratio, calculated by dividing share price by EPS. They have a P/E (FWD) ratio of 12.79x compared to the sector ratio of 16.74x. It shows that they are undervalued. The second ratio is the EV / Sales ratio which compares the company's enterprise value to its yearly revenue. They have an EV / Sales (FWD) ratio of 0.43x compared to the sector ratio of 1.67x. After looking at both ratios, I believe they are undervalued and have a lot of growth potential.

Risk

Due to client layoffs and a dearth of work in its temporary staffing pool, the number of unemployment claims tends to increase when the economy is weak in their marketplaces. Increased state and federal unemployment tax rates brought on by an increase in jobless claims are frequently impractical to pass along to customers simultaneously because of pre-existing client service commitments or pressure from competitors to lower prices. Increases in their state and federal jobless tax rates could significantly harm their financial performance, especially early in the year when payroll tax rates are at or close to their highest levels.

Bottom Line

The company reported strong yearly and quarterly results with rising revenues and net income despite significant inflationary pressure, difficulties with the supply chain, and a tight labor market. They are looking fundamentally and technically strong. In addition, the management has provided optimistic revenue guidance for FY23. I believe they have great growth potential, and it can provide significant returns to its shareholders in the long term. Hence I assign a buy rating on BBSI.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.