There was a definite slowdown in temp staffing during the second half of 2015 and the beginning of 2016. The slowdown was mainly in the energy and industrial sectors. The staffing business is cyclical, and would be hit hard in a recession so this is a clearly defined risk. Since I believe the economy is not headed in to a recession and the NFP numbers will remain strong, I expect staffing to firm up. Robert Half (RHI) stock price currently has a $44 handle, and it has fully priced in the staffing slowdown. I believe this level is still pricing in a decent probability of a recession, and is certainly not priced for a pickup in the staffing business. If the job market remains firm and staffing improves, Robert Half stock could recover to $50 - $60 range over the next 6-12 months.
Robert Half's financial performance has been above its industry average. Robert Half is currently growing and expected to continue to grow revenue at a rate of 7% which is the lower end of its 5-year revenue growth range of 7-15%. Over the past 5 years, Robert Half grew revenue at a 9.9% CAGR while the professional services industry grew revenue at a 9.1% CAGR. Over the past 5 years, Robert Half grew eps at a 43.6% CAGR while the professional services industry grew eps at a 17.4% CAGR.
Robert Half (RHI) is trading at a discount to fair value. At a trailing PE of 15.8x and a forward PE of 14.3x, Robert Half is trading at a discount to the S&P 500 which has a trailing and forward pe of 19.6x and 16.7x. Robert Half's average trailing PE over the past 5 year is 24.9x. The professional services industry is trading at 29.9x pe, right on top of it's 5 year average of 29.3. The industrials sector is trading at a forward pe of 16.3x with a 15-year average of 17.0x.
Although there has been a slowdown in temp staffing, the overall labor market strong which is a good environment for the staffing business. Employers put a higher premium on recruiting services in a tight labor market and this improves margins of the staffing business. The slowdown in the staffing business has not worked its way into the NFP numbers yet. Temp staffing employment, shown in the graph below, is viewed as a leading indicator of overall employment. The recent weakness in temp staffing could mean some weakness in NFP reports to come, and Robert Half's stock has priced in this weakness. If NFP stays firm or improves, then Robert Half has a lot of headroom to rally.
Protiviti is Robert Half's consulting business which competes with the big four accounting firms. Protiviti is growing faster than the staffing business with better margins. Protiviti is performing exceptionally well with strong revenue growth of 15.4% in 4Q and margin expansion. Protiviti growth has been driven by internal auditing and compliance. Protiviti operating margins are in the mid-teens. This is higher than Robert Half overall, which had an operating margin of 11.4% in 2015. Protiviti accounted for 14.9% of revenue in 4Q. The faster growing Protiviti segment is increasing as a percentage of revenue and is expanding operating margins. Protiviti also diversifies the main staffing business.
If Robert Half pe multiple were to expand to the same pe multiple as the industrial sector average, then the pe would increase from 14.3x to 16.3x. Robert Half forward eps is 2.91, so 2 turns would increase the stock price by 5.82., or 13.2%. If all goes well, I could see Robert Half above $50 in short order and approaching $60 in the next 6-12 months.
Michael Grove, CFA