Lakewood Capital Management recently released its Q2 2020 Investor Letter, a copy of which you can download here. In the letter, among other things, the fund reported a net profit of 10.7% for Q2 2020. You should check out Lakewood Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the said letter, Lakewood Capital highlighted a few stocks and Insperity Inc. (NYSE:NSP) is one of them. Insperity Inc. (NYSE:NSP) provides human resources and administrative services to small and medium-sized businesses. Year-to-date, Insperity Inc. (NYSE:NSP) stock lost 20.9% and on August 3rd it had a closing price of $68.02. Here is what Lakewood Capital said:
“Earlier this year, the fund initiated a position in Insperity, a provider of outsourced human resources for small- and medium-sized businesses. We began purchasing shares in February as the stock declined significantly following disappointing earnings and guidance related to an unusual spike in employee benefit costs. Subsequent share price declines during the March stock market sell-off, primarily due to concerns about the health of the company’s core customer base, allowed us to purchase additional shares in a high-quality, growing and cash generative business at an extremely discounted valuation.
Insperity operates what is called a Professional Employer Organization (PEO), whereby it serves as the co-employer for around 240,000 worksite employees (WSEs) across almost 9,000 companies. Insperity provides a wide range of human resources offerings to its clients and uses its position as a large “employer” to negotiate lower benefit pricing (including health insurance and workers’ compensation) than its clients would be able to obtain individually. This model has proven remarkably successful, with Insperity growing WSEs by 9% annually since 1999, while expanding gross profit and EBIT during the same period by 11% and 15% per annum, respectively. We believe there is a long runway for growth ahead as the penetration rate of the co-employment model in the small- to mid-market workforce is only about 5%.
Despite its long history of strong operational and financial performance, Insperity has been under pressure for the past year due to elevated employee benefit costs. Over short periods of time, Insperity is exposed to fluctuations (both good and bad) in benefit costs as it effectively self-insures across its large employee base. Following particularly good results in 2018, the company saw an anomalous amount of large healthcare claims from a small subset of employees in 2019, which had a substantial negative impact on earnings. As we researched the business and analyzed the 2020 outlook, it seemed unlikely that anything in the company’s financial model or margin profile had structurally deteriorated. We believe that there is significant upside to Insperity’s earnings through either a normalization in benefit costs or a proactive repricing of problem clients should the issue persist.
While COVID-related declines in employment will be a clear near-term headwind for the business, we think this environment has also given Insperity the opportunity to reinforce the value it provides to its clients. During the lead-up to the recently passed CARES Act, Insperity built all of the detailed reporting capabilities needed by its clients to apply for Paycheck Protection Program loans. These actions allowed about two-thirds of its clients to run the necessary reports the first day banks began accepting applications and provided a further benefit to Insperity by ensuring its client base received government aid to keep staff retained (and therefore remain co-employed by Insperity).
Given the depressed near-term margin and earnings level and the company’s significant long-term growth potential with low capital intensity and high cash generation, we value the shares using a discounted cash flow analysis and a 9% cost of capital (likely conservative in the current rate environment). Two years from now, we believe the stock will likely be worth around 20x earnings or $115 per share (including dividends), representing 70% upside from the current share price.”
In Q1 2020, the number of bullish hedge fund positions on Insperity Inc. (NYSE:NSP) stock increased by about 38% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with Insperity’s growth potential. Our calculations showed that Insperity Inc. (NYSE:NSP) isn’t ranked among the 30 most popular stocks among hedge funds.
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Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.
