There are times in investing when the market does incredibly strange things. For instance, consider the case of Robert Half International Inc. (NYSE:RHI). Its share price was beaten up in Q3 only to surge over 25% since late November. Have economic and employment prospects really gotten that much better since November? Or to put it another way, were they really that bad in Q3?
Robert Half is International is International
I’ve long been interested in how certain bellwether stocks are actually governed by overriding macro-economic movements. With that said there are fewer companies where this applies better than RHI and its employment services offering.
A quick look at revenues for the last quarter shows that US staffing revenues made up 65.5% of revenues, with International staffing at 22.9% and Protiviti (risk and business advice) at 11.6%. In previous cycles analyzing Robert Half really wasn’t that hard. Its main areas of activity naturally followed the global (developed world) economy, which in turn was pretty much synchronized. That’s not the case this time around.
In this graph I have charted
1). Non-Farm Payrolls data from the Bureau of Labor Statistics (3 month changes)
2). Gross Margins for Robert Half by quarter
3). The percentage of revenue from Robert Half’s last quarter divided by the rolling sum of the last four. This is a good indication of an employment recovery
There are a few things to note here.
1). The current employment recovery is similar to previous cycles, but is also disappointing because so many more jobs were lost in the last recession
2). Gross Margins are on an ongoing uptrend and remain indicative of ongoing recovery
3). The revenue metric has turned down a bit lately and is not in line with previous recoveries. I think this is a consequence of worsening conditions in Europe
In short, RHI really is an international company and its international operations are holding things back. But is this good or bad news?
Blame Europe Again
It really is a tale of two regions, with every line of its US business showing sequential growth in the quarter. This trend has continued into January, with RHI declaring that the first four weeks of the year saw permanent placement revenues in the US up 10% and non-US down 28%. The difference in temporary placements is less pronounced, but still comes out as up 5% in the US and down 7% elsewhere.
These numbers are horrible, but the good news is that RHI seems to think that it’s in a bottoming process, as the sequential declines are getting smaller. Moreover, the January numbers above are only for a few weeks. I think the Q1 guidance for revenues of $1.01-$1.06 billion looks a bit conservative and is somewhat reflective of the weakness in Europe. Its mid-point implies revenues to be flat on a sequential basis. With the share price rise after the results it’s clear that the market doesn’t really believe the guidance!
Commentary on Employment Market and the Sector
In general I though RHI’s discussion on the employment situation in the US was quite positive. The Automatic Data Processing (NASDAQ:ADP) report has been indicating that small and mid size companies are hiring, and this is typically a very good sign for the economy. ADP is a much touted ‘employment play,’ but I’m not sure that this cycle will turn out the same for the company. It is facing some strong competition in its business services offering (where it is hoping for growth), and this is a marketplace susceptible to cloud-based competition. ADP recorded 15% growth in its business service and professional employer organization (PEO) services at the last set of results, and I think there is good reason to believe that its mid-single digit full year revenue guidance growth is a tad conservative.