Robert Half International: 14% Upside Not Enough Margin Of Safety
Summary
- Robert Half International has demonstrated consistent revenue growth and robust free cash flow generation over the past decade, establishing itself as a market leader in the staffing industry.
- Despite a projected downturn in 2023 due to an economic slowdown, RHI maintains a positive outlook for the future, with anticipated double-digit earnings growth in the following years.
- The company's intrinsic value, calculated through discounted cash flow analysis, suggests that RHI might currently be undervalued, offering potential gains for investors.
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Intro
Robert Half International Inc. (NYSE:RHI) operates globally, offering staffing and risk consulting services across North America, South America, Europe, Asia, and Australia. Its operations consist of three segments: Temporary and Consultant Staffing, Permanent Placement Staffing, and Risk Consulting and Internal Audit Services. The company provides a wide range of staffing solutions, including temporary and full-time positions in accounting, finance, administration, IT, legal, creative, marketing, and public relations fields. Additionally, it offers consulting services in internal audit, technology, risk, compliance, and business performance.
In this article, we will conduct a comprehensive analysis of RHI's financial performance and growth prospects. Our evaluation will encompass a thorough examination of the company's revenue patterns, profitability metrics, and its ability to generate free cash flow. Additionally, we will assess RHI's strategic position within the staffing industry and provide an outlook for its future trajectory. By considering these key factors, investors can obtain valuable insights into RHI's potential and make well-informed decisions regarding its suitability as an investment opportunity in the current market landscape.
Growth
A high growth rate in both revenue and free cash flow is essential for several reasons. Chiefly among them, a high growth rate indicates that RHI is expanding its market presence and gaining a larger share in its industry. A growing revenue base allows companies to invest in research and development, marketing, and expansion into new markets, thereby fueling further growth opportunities. RHI has demonstrated impressive financial performance over the years. With consistently growing revenue and robust free cash flow, RHI has established itself as a market leader.
Revenue Growth: RHI's revenue has experienced a steady upward trajectory, indicating its strong market presence and successful business strategies. Over the past ten years, RHI's revenue has grown from $4.24 billion in 2013 to $7.24 billion in 2022, reflecting a remarkable total growth of 70.47%. What we find most intriguing about RHI's revenue growth over the years is just how consistent the company has been. While the compound annual growth rate (CAGR) of RHI's revenue stands at a commendable 5.48%, the company has managed to increase its revenue in all but one year during the past decade.
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Free Cash Flow Growth: Apart from achieving robust revenue growth, RHI has also showcased exceptional performance in generating free cash flow. Free cash flow represents the cash available to the company after covering operational expenses and capital expenditures. It is a crucial financial metric that highlights a company's ability to fund future growth opportunities, repay debts, and provide returns to shareholders.
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RHI's free cash flow has consistently grown over the years, reflecting its strong financial position and efficient capital allocation. From 2013 to 2022, RHI's free cash flow increased from $255.49 million to $622.63 million, demonstrating a remarkable total growth of 143.70%. This significant growth in free cash flow has been instrumental in strengthening RHI's financial resilience and providing flexibility to pursue strategic initiatives.
With a compounded annual growth rate CAGR of 9.32% in free cash flow, RHI has consistently improved its ability to generate cash and create value for its stakeholders. This sustained growth in free cash flow is a result of RHI's disciplined financial management, cost optimization efforts, and efficient operational practices.
RHI's impressive revenue and free cash flow growth in the past decade can be attributed to various factors, one of which is the thriving demand for staffing services. With businesses across all scales seeking the assistance of staffing agencies to secure competent staff, the industry has experienced steady growth. RHI has successfully capitalized on this trend, particularly in its core markets of IT and finance, providing comprehensive staffing solutions to meet the growing demand for qualified professionals.
Furthermore, RHI has achieved an extensive list of awards and recognition over the years that exemplifies their outstanding performance across various domains. In 2023 alone, RHI received numerous accolades, solidifying their status as a top-tier employer. Notably, they featured on esteemed rankings like Fortune's Most Admired Companies, Forbes' Best Employers for Diversity, and America's Best Professional Recruiting Firms.
These commendations showcase RHI's unwavering dedication to gender equality, employee satisfaction, diversity, and exceptional recruitment services. Such accomplishments firmly establish RHI as an industry leader committed to excellence in the staffing and consulting sectors.
Importantly, these accolades significantly contribute to RHI's financial success. By bolstering their brand value, RHI gains a competitive edge and cultivates customer trust and loyalty. The recognition as a top employer not only attracts the best talent in the industry but also ensures client satisfaction and repeat business. RHI's ability to consistently deliver exceptional services, foster a diverse work environment, and prioritize employee well-being leads to increased revenue, enhanced profitability, and sustained growth. Ultimately, these well-deserved accolades affirm RHI's position as a financial powerhouse in the staffing and consulting realms.
Profitability
Being more profitable than its competition is crucial for a company because it signifies superior financial performance, demonstrating effective cost management and revenue generation strategies. Profitability enables a company to reinvest in its operations, fund innovation, and pursue growth opportunities, ensuring long-term sustainability and competitiveness in the market. Historically, RHI has been more profitable than its competitors, it's achieved higher gross profit margins, EBIT margins, net income margins, FCF margins, and returns on equity than its sector median.
Data by Seeking Alpha
RHI's remarkable track record of profitability can be largely attributed to its exceptional management team, renowned for their proven success. The team's effective execution of the company's growth strategy has consistently yielded strong financial results, solidifying RHI's position as a leader in the industry.
RHI's impressive executive team is led by President and CEO Keith Waddell, who has been with the company for over 37 years. Robert Half has experienced remarkable growth since Waddell joined the company. Waddell played a key role in transforming the business from a $7 million staffing franchisor to a global industry leader, with annual revenues reaching $7.24 billion in 2022. Additionally, Waddell was instrumental in establishing the Protiviti subsidiary, which has become a prominent global consulting firm and a driving force behind the company's growth as Protiviti just completed its 22nd consecutive quarter of year-over-year revenue growth.
Waddell's guidance has led Robert Half to embrace digital transformation initiatives which has turned into another strength for the company driving these outstanding profitability metrics. RHI is now leveraging AI and machine learning in various areas such as recruitment, digital marketing, and lead generation, solidifying the company's competitive position in the digital era.
We believe in the staffing industry, the value of a company lies in its people, and RHI recognizes this by fostering an exceptional leadership team. With their demonstrated capabilities, this team is poised to steer the company toward continued growth and prosperity in the future. RHI's commitment to cultivating talent and strong leadership ensures a solid foundation for sustained success.
Outlook
A strong outlook is essential for a company as it instills confidence in stakeholders, including investors, employees, and customers, which can attract support and resources. It provides a clear vision and direction for the company, enabling effective planning, decision-making, and goal-setting.
Despite analysts projecting a challenging year for RHI in 2023, with estimated earnings of $4.54, indicating a 24.79% decline year over year, the company maintains a positive outlook for the future. Analysts anticipate double-digit earnings growth for RHI in the following three years, reflecting optimism about the company's potential.
Data by Seeking Alpha
The projected downturn for the rest of 2023 can be primarily attributed to the expected slowdown in the economy. We believe this is the number 1 risk for the company moving forward, this economic deceleration may result in reduced demand for temporary workers as businesses become more cautious about hiring additional staff amidst slower growth expectations.
While an economic slowdown can have a negative effect on RHI's business, RHI actively tracks economic indicators and business trends across the countries it operates in, enabling the company to anticipate demand for its services. By evaluating these trends, RHI determines the optimal level of investment, including personnel, to position itself for success in the present and future global macroeconomic climate. This proactive approach allows RHI to adapt to changing market conditions and make strategic decisions that align with prevailing economic dynamics.
Looking beyond 2023, RHI is poised to regain growth momentum, fueled by its strategic investments in technology. The company's substantial investment in technology has resulted in enhanced efficiency and productivity, translating into reduced costs and increased profitability.
With anticipated capitalized expenditures ranging from $100 million to $120 million in 2023, RHI will continue to prioritize software initiatives, technology infrastructure, and the implementation of cloud computing arrangements, further amplifying efficiency and productivity gains. These ongoing investments will support RHI's future success and drive sustained growth in the coming years.
Valuation
To assess RHI's true value, we will employ the discounted cash flow (DCF) analysis. By calculating the present value of anticipated future cash flows, we can determine the intrinsic worth of the company. Commencing with RHI's previous year's free cash flow of $622.63 million, we will apply an initial growth rate of -24.79% for 2023, followed by growth rates of 15.64% for 2024, 18.63% for 2025, and 11.23% for 2026 based on average analysts' estimates for earnings growth seen in the section above.
Beyond this period, we will utilize a growth rate of 7.40% for years 6-10, derived from the average compound annual growth rate of RHI's revenue and free cash flow over the past decade. Employing a discount rate of 10%, based on the average return of the S&P 500 with dividends reinvested, and a conservative perpetual growth rate of 2.5%, we determine the intrinsic value of RHI to be $94.66. This suggests that RHI might currently be undervalued, offering investors a potential gain of 14.48% compared to the company's current market price.
Author's Work
Final Word
In conclusion, our analysis of RHI reveals a company with strong financial performance, growth prospects, and a solid strategic position in the staffing industry. RHI has demonstrated consistent revenue growth, robust free cash flow generation, and profitability higher than its competitors. The company's investments in technology, commitment to employee satisfaction, and numerous accolades contribute to its success.
However, despite the anticipated growth ahead, the current market price does not offer a deep enough discount to RHI's intrinsic value. Therefore, we are placing a hold rating on RHI's stock, closely monitoring its performance, and reassessing the investment opportunity if the stock becomes available at a more attractive valuation.
This article was written by
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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