Staffing Service Stocks On A Roll

Staffing firms have struggled a lot in recent years under the impact of a struggling economy, drying sources of income, and ballooning losses. However, a recovering economy bodes well for companies such as Heidrick & Struggles International, Inc. (NASDAQ: HSII) and Kforce Inc. (NASDAQ: KFRC).

Shares of Heidrick & Struggles International jumped more than 20 percent early this month after the executive search firm acknowledged that it had been approached for a possible sale of the business. Executive search has increasingly become a difficult business to operate in as margins have practically vanished. The management has decided to explore strategic alternatives although there is still a good possibility of the company continuing on a standalone basis as in the past. The management did not disclose more information but according to various other reports, Heidrick & Struggles has received multiple proposals from private equity firms, the Blackstone Group (NYSE: BX) being one of them. The offers are likely in the range of $18.50 to $20 per share. This indicates a further upside from the current level of $17. After a restructuring, the company posted a profit of $6.2 million last year even as sales dropped 16.1 percent to $465 million. This translates to a net profit margin of just 1.3 percent in yet another indication of the hardships faced by the company in specific and the industry in general. However, the situation appears to be changing with a marked improvement in economic activity and the reported bids appear to be factoring in future prospects. Heidrick & Struggles is an unleveraged company and offers a dividend yield of 3 percent.

Similarly, Kforce Inc. is witnessing a turnaround in its operations. The company offers professional and technical specialty staffing services in areas including Technology, Finance and Accounting, Clinical Research, Health Information Management, and Government. While sales are almost stagnant, the company has managed to post profits during the last three quarters. For the latest quarter ended March 31, 2013, its net margin turned out to be 1.2 percent; nothing great but much better than -3.3 percent for the full year 2012. Kforce issued a conservative guidance for the second quarter which caused the shares to tank in early May but analysts are upbeat about its prospects as unemployment rates continue to decline and more people join workforce. This is reflected in the forward price earnings ratio of 14.6. The company has a low level of debt on its books which has helped in navigating through tough times. The latest sequestration efforts are likely to delay a rebound in the economy which, in turn, may affect a recovery in this stock but Kforce still offers excellent long term growth.

Disclosure: I 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.