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.
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?
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.