Companies 0 See All
Hedge Funds 0 See All
Insiders 0 See All
Institutional Investors 0 See All
Click here to see all results for
News

Robert Half International Inc. (RHI), Manpowergroup Inc (MAN): Staffing Stocks Have Defied Jobs Numbers…What’s Next?

Published on August 7, 2013 at 8:55 am by The Motley Fool in News

Since 2009 staffing and employment service stocks have been on a surprising march upward, as nearly every company has performed amazingly. With high unemployment, this performance has surprised some; but as I’ve written previously, temporary staffing can actually do better during periods of high unemployment.

Robert Half International Inc. (NYSE:RHI)

Up until this point, racking up winners in staffing has been like shooting fish in a barrel. So how can one pick winners from losers in staffing?

Getting picky

When you look at staffing right now, every company is winning so you have to evaluate “good” and “bad” based on future risks and quality of earnings. If you just judge these businesses on EPS growth, they’ll all look pretty good.

I think there is a lot of risk in businesses that focus on the temporary placements of un-skilled, light-industrial, workers. This is an area where you can seperate two staffing firms that are both performing well, like Robert Half International Inc. (NYSE:RHI) and Manpowergroup Inc (NYSE:MAN).

Unskilled temporary staffing is subject to many potential risks that aren’t so obvious. One surprising risk would be any increases in the prices of everyday household goods.

In 2007 the costs of gas prices, food, and other basic living costs increased dramatically. As these costs went up, wages for low income workers did not increase (minimum wage usually trails inflation). When this happens, unskilled temporary staffing companies experience shrinking margins. Recruiting on low wage positions also gets more difficult, and workers become increasingly dissatisfied and less reliable.

Rising costs of basic goods could hurt Manpowergroup Inc (NYSE:MAN)’s bottom-line more than high, but steady, unemployment rates. Over the past five years costs of food, utility (gas) bills, gasoline, housing, and other goods declined (at first) and still haven’t exploded upward; at the same time companies have preferred temporary hires of low-wage employees to full-time commitments. Could both of these trends be due for a change?

Unskilled labor=risky revenues

On the surface Manpowergroup Inc (NYSE:MAN) and Robert Half International Inc. (NYSE:RHI) seem to have a lot in common. Both companies have done well through some tough times, and both beat on earnings in their most recent quarter. But they beat for very different reasons, Manpowergroup Inc (NYSE:MAN)’s beat was mostly due to cost cuts.

Robert Half International Inc. (NYSE:RHI) on the other hand showed a 10% sales gain in their tech staffing business during the second quarter. The placement of IT and Accounting professionals is easily one of the highest margin sections of temporary staffing, and Robert Half International Inc. (NYSE:RHI)’s versions are both the best of breed.
Robert Half International Inc. (NYSE:RHI)’s growth in highly skilled placements is growing gross profit margins and led to a whopping EPS gain of 40% for the second quarter! Keep in mind, that’s a 40% gain on last year’s, already great, figures.  This company is beating quarters that beat previous quarters. As their CEO highlighted on Robert Half International Inc. (NYSE:RHI)’s second quarter call: “this was the 13th consecutive quarter in “which net income and earnings per share have grown 15 percent or more on a year-over-year basis.”
While Manpowergroup Inc (NYSE:MAN) relies on lower margin placements, 80% of  Robert Half’s revenues come from skilled staffing. If you’re looking for something to separate “winners and losers” in the staffing industry, this is it.
In addition Manpowergroup Inc (NYSE:MAN) derives nearly 40% of its revenues from the troubled Southern European economy. As margins on unskilled workers are crimped, Manpower has had to take on a wider plate of clients. Taking on a wider range of clients exposes Manpower’s industrial workers to potential workplace injuries, which opens up an entirely new risk to Manpower–higher worker compensation costs. Manpower is clearly a good business, but the risks are everywhere.
If I had to pick just one
As much as I like Robert Half, if I had to pick one staffing business in this market it likely wouldn’t be one that focused on temporary business.
When recessions hit, I actually prefer temp business. Management positions are cut during recessions, and corporations like the flexibility that temporary placements offer for non-executive positions. But when things turn around executives are needed, and so are executive search (i.e. “permanent placement”) firms.

So if I had to pick just one business in employment services it’d probably be

Korn/Ferry International (NYSE:KFY). This business specializes in highly skilled permanent placement staffing and consulting. They are “head hunters” with an outstanding reputation of finding executive level talent, in very competitive industries, for hefty fees.
Korn/Ferry International (NYSE:KFY) is also coming off of another strong quarter, with EPS growth of 14% and sales growth of 20%. Revenue has increased double digits in each of the past two years, and margins increased 6% for Korn/Ferry International (NYSE:KFY) last year.
I like that Korn/Ferry International (NYSE:KFY) is also branching out into new employment consulting services, because they work in tandem with their permanent placement offerings. FutureStep, one of Korn/Ferry International (NYSE:KFY)’s fastest moving business units offers RPO (recruitment process outsourcing) consulting. What makes this an acceptable growth avenue for Korn/Ferry International (NYSE:KFY) is that RPO services are very low-overhead, high-margin, services just like Executive Search.
It all fits, and it all is absent of the risks associated with temporary staffing.
If you’re interested in the stock you’ll want to check the different service offerings listed on their websites, as well as their nifty new acquisition of a recruiting software firm. But rest assured, this is the best and most trusted name in the world of “head hunting,” and I doubt that any new growth avenues will take their focus off of that.
The best of the best
There’s an important advantage that executive search firms hold over temporary staffing businesses, and it comes down to management. While Korn/Ferry has to do all of the upfront recruiting that a Manpower or Robert Half must do, once the placement is made they are free of any risk.
Korn/Ferry recruits candidates; Manpower and Robert Half recruit and manage candidates. Anything can happen once that placement is made.
So while I find Robert Half and Korn/Ferry equally impressive in their respective spaces, I think Korn/Ferry makes for a better stock pick at this stage.

Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Robert Half International. Adem is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Staffing Stocks Have Defied Jobs Numbers…What’s Next? originally appeared on Fool.com is written by Adem Tahiri.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Show more...Show less

Related Insider Monkey Articles
Robert Half International Inc. (RHI), Monster Worldwide, Inc. (MWW): A Look...Do Hedge Funds and Insiders Love 51job, Inc. (ADR) (JOBS)?
Compass Diversified Holdings (CODI): Insiders Are Buying, Should You?Robert Half International Inc. (RHI), CGI Group Inc. (USA) (GIB): Obamacare...
Robert Half International Inc. (RHI) - Behind the NumbersManpowergroup Inc (MAN), Kelly Services, Inc. (KELYA), Robert Half International...