We get the Job Reports tomorrow and I thought this might be a good time to be talking about staffing services.
Most of these companies have already taken quite a tumble but it would seem that given the estimates there is further downside in these names. The entire industry has a D+ rating on MarketSmith which tell you the momentum is not great either.
As for relative strength on the individual stock prices, that's also declining. The four companies we're looking at are for swing shorts:
Robert Half International - RHI
Korn Ferry - KFY
ASGN Inc - ASGN
KForce Inc - KFRC
Staffing issues were a thing during the pandemic, primarily because people did not want to work. This was what gave rise to the imbalance in demand and supply that the Fed has been quoting for the last one year. This is also reflected in the Labor Force Participation Ratio that remains weak.
These firms provided an essential service in sourcing staff to fill roles. More importantly, they helped fill temp roles, that were needed when goods demand and supply chain issues erupted.
However, now we see that temporary employment is falling.
the recent NFIB small business survey shows that the percentage of small businesses who are planning to hire are declining steadily.
And finally, we have major companies letting go of a lot of staff and eliminating these roles altogether. Most of these have been banks and tech companies that employ very specialized staff and since the entire sector is retrenching staff, it would be harder for these workers to find jobs. It's unlikely that these staffing companies would even offer the help. This is what happened to bankers in 2008-2009.
As far as the fundamentals go. These companies are not terrible. Yes, they work on thin margins but they also don't carry a massive amount of debt.
They have been growing revenues for the past one year but, it's becoming increasingly challenging for them to grow net income. Most of them has seen their cash balances decline in the last one year but, on the positive side, they have also cleared out some of their debt.
All these companies still remain Free Cash Flow positive and have very little capex spend. They also have lower debt repayments now so, there is substantial free cash flow to equity.
However, their decline in net income / EPS is troubling and in the economic climate, they are expected to see tough times ahead. If you compare their EV/EBITDA with their forward EV/EBITDA, you can see that Korn Ferry (KFY), Robert Half (RHI) and ASGN are expected to see negative growth, while Kforce is expected to have marginal growth.
When shorting companies, it's always good practice to keep your Stop Losses tight, maybe even at 3%. Another, important point to consider is that you should take profits early since we are experiencing a very choppy market.
As for the companies themselves, they could experience some reversal in price if we see the unemployment start to inch up because the theory will then be that there are people who are out of jobs and actively looking. Some of these people, even though they may be specialized, will seek out these staffing services in order to take up temp roles in any industry.
As conditions get tighter, and savings start to dwindle, expenses will pile up. Those who were holding out for job offer may find it necessary to use professional agencies to place them.
Closing Thoughts
Looking at the industry chart, we think that there may be at least 10% downside in these names. During the GFC, the downturn in temporary staffing services was about -30% and during the DotCom crisis it was about -13%.
None of the above is investment advice. I have no position in this company but, I may initiate a short position 3 trading days after the publication of this article.