Temporary staffing is about to get squeezed. This employment segment, actually employment altogether, is largely misunderstood by the market. With that said, it's not "disappointing" jobs numbers that will cause this pain.
Actually, most investors would be surprised to learn that temporary staffing does very well during periods of sustained, high unemployment like this one.
This unemployment percentage chart, provided by our friends at the Bureau of Labor Statistics, makes me chuckle.
With all the week-to-week consternation over jobs numbers, you'd think we'd had more than a 0.5% variance in unemployment over the past year! But this trend is past due to change, and coupled with two other factors it could create a "Bermuda Triangle" of margin concerns for temporary staffing firms.
1). The unemployment rate will break its current tight volatility range. The last two weeks of unemployment claims have been at 362,000 and 344,000. The market thought one number was "good" and one was "bad," but they're both really an indicator of shocking consistency. At some point this will break, and claims will either drop below 350,000 consistently, dropping unemployment significantly, or they'll rise. Unfortunately, either outcome will cause short-term pain in temporary staffing.
2). Workers compensation costs are rising quickly
3). Gas prices are already high and headed higher
It's time to lock in your gains
If you own shares of Trueblue Inc (NYSE:TBI), selling is probably the last thing on your mind. But with the stock trading near a 52 week high, you should probably consider locking in your gains despite the stellar performance.
And the performance has been great. TrueBlue's Labor Ready brand has benefited from employers uncertainty, and wish for "non-committal" temp labor. EPS is up 16% year over year, and the company torched its most recent quarter (36% beat.) But beneath the surface, the "Bermuda Triangle" is ready to strangle TBI's near-term margins.
1). Trueblue Inc (NYSE:TBI) has had to drastically expand its business to keep up with the demand for temporary labor, recently acquiring MDT Personnel. This expansion puts the company in a tough spot should any change (good or bad) occur in the unemployment rate. If the rate decreases and employers get less "jittery," permanent placement will benefit, not temporary; TrueBlue, unlike most staffing companies, is 100% temp. If unemployment rises, TBI's expansion and the costs associated with it could be catastrophic. It's also worth noting that the companies CEO is said to be considering another acquisition "aggressively."
2). Labor Ready, TrueBlue's flagship brand, specializes in light industrial staffing and day labor. This business surges during times of manufacturing expansion and employer uncertainty-we've had both recently. The good times have a catch: an inherit risk to this business is its exposure to workers injury risk. With workers compensation rates set to rise sharply, TrueBlue will feel the impact more than most staffing providers because of the markets it serves.
3). Finally, gas prices will affect TrueBlue negatively, and I promise I'm not just picking on the company. This is actually an oft-missed margin killer to temporary staffing and light industrial type businesses. TrueBlue specializes in unskilled labor, at low wages. Increased gas prices will affect their employees more than most, and at some point wages will need to increase, if even slightly; their clients will not want to pick up the tab.