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

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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.
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