Tuesday, December 29, 2009

Jobless Recovery in 2010 - MF Global

Recently MF Global released a research note concerning the top ten trends in 2010. One of the trends was the premise of a jobless recovery.

The following is the investor note from MF Global:

"2010 will be characterized by a jobless recovery. MFGR sees the unemployment rate peaking at 10.5% and closing the year between 9.5% and 10%. The unemployment rates in EM and ASEAN counties should fall more steadily while it will likely increase in Europe. MFGR is expecting the latter as many of the stimulus programs initiated by European government included programs directed solely at hiring or preventing layoffs.

Out of a survey of 10 Euro-Zone countries, 8 employed labour activation measures. Many of these programs are set to expire in the new year. As employers are facing a lack luster recovery, the likelihood of a robust expansion in the labour markets sans government incentives is minimal. Furthermore, employers will likely be forced to cut back on labour as its costs up to the point have been subsidized.

On the US front, the outlook for taxes is murky and the healthcare initiative which will likely force all employers to provide care or pay a penalty will discourage the expansion of the labour force. Though the Obama administration is extending the capital gains holiday for small businesses, employers need to feel confident that their profit margins will not erode in the future due to tax increases in order to genuinely contribute to job growth. Moreover, budget shortfalls at the state and local government level will cap government hiring.

Globally speaking, there has been a significant increase in structural employment that is now part of the new normal. The collapse of the financial markets has led to a permanent shrinkage of the financial industry and the impending regulation will make financial innovation, a factor that does lead to job growth, very difficult. The manufacturing industry faces the same problem. Globalization will lead to the removal of manufacturing jobs in advance economies and cause a shortage of skilled labour forcing many to look to build other skill sets."

Source: MF Global

Tuesday, December 22, 2009

Manpower Robert Half Valuation

  • For the past week there has been bullish sentiment again in the human resource, temp space.
Robert Half International (RHI) received upgrades and revisions to their expectations.

While Manpower (MAN) received an upgrade from Banc of America ML.

I'm a bit more cautious on the space especially with the run up for this past year. Although there has been an improvement in jobs lost; there continues to be an underlying problem in the global economy.

This growth has been fueled by government stimulus and not so much private sector demand. And the growth has been muted by recovery standards. The US for example revised their GDP growth for the 3Q down to 2.2%.

While employment survey after survey still speak to weak to flat growth for Q1 of 2010.

  • Valuation alone I would avoid the space till there is more clarity that there will not be a double dip recession. With commercial mortgage and ARMS, debt, and continued restrained spending by the consumer, and depressed wage growth there will be significant challenges abound to job creation.
  • Higher taxes in 2010 will be a certainty in the US. And that will depress consumer demand. The risk that this will further depress job creation with demand as slack as it is.
  • Valuations have run up to the point where these human resource stocks must meet or blow out its numbers. Take for example Manpower (MAN). I have pointed out MAN due to its lofty valuations in comparison with its competitors.
  1. Trading at close to 90x p/e, and on a normalized base close to 60x earnings. And this considering that they have had earnings that have declined with the growth implosion of 2007. I normally track the technology sector where growth is more attractive. Manpower is trading at multiple that are present for a technology company. Unfortunate the last growth that MAN has seen was back in 2007.

Wednesday, December 16, 2009

Department of Labor 2008 - 2018 Projections

The United States Department of Labor released their latest projection of what the future holds for US labor.

The labor force looks too decline as I've suggested. This just confirms that growth in the US will continue to decline unless something truly changes such as a competitive advantage, or technological advance helps the sagging growth in the US.

Also of note is the growth in the demographics such as the Hispanic population.

And where the growth in jobs are headed. Manufacturing and production seems to be on a steep decline.

The file can be downloaded through the following link (Please be aware this is a pdf file) :


Tuesday, December 15, 2009

Staffing Valuations Manpower MAN Kelly Services KELYA Robert Half RHI

So I was looking at the valuations of staffing firms after the recent run up, and with the 3rd quarter results having been reported.

Please do your own research on the following equities.

Points taken that seems surprising amid the still weak conditions for hiring.

  • Among the competition only three had positive earnings, this includes:

  1. ComForce (CFS)

  2. Manpower (MAN)

  3. Robert Half International (RHI)

  • Manpower (MAN) and Robert Half International (RHI) are trading at a significant premium to its enterprise value.

  • RHI has looked more favorable during its recent quarter. As the data above states they have managed their long term debt levels, and actually have a positive return on assets & equity.

  • MAN has continued to look like a balloon that is about to pop. On all metrics its stock has looked expensive. Trading on 86x earnings, market cap that exceed its enterprise value, heavy debt levels compared to its assets and equity, negative return on assets and equity. Margins also look weak compared to the rest of the sector.

As stated in prior posts the staffing sector continues to look fairly rich. RHI looks mildly attractive due to its cost control. While MAN still looks exceedingly rich in its valuations. It is trading as if it is a tech stock without the growth nor the cost control of its peers.

Feel free to chime in to create a discussion.

Monday, December 14, 2009

Unemployment trending down

Entering 2010 the U.S. unemployment rate is at 10%. Although I still find very limited prospects for hiring from most large corporations, and small businesses in the US I still expect the unemployment rate to trend down.

This is partly due to the Census entering the hiring juggernaut. The US government is expected to hire around 800,000 individuals that will bring the unemployment rate down. This will look positive on a short term viewpoint, however longer term unemployment will still be at historical levels.

There will also be increased churn among employees as they look for the economy to improve to switch companies. Rates of disgruntle have increased as hourly wages, and hours worked have been cut dramatically. Until capacity utilization reaches a peak or robust levels there will continue to be a weak demand for labour.

Wednesday, December 9, 2009

Sluggish Recovery In The US Economy And Employment

So I've been looking at the government figures of their latest unemployment report from last week. The government figures beat consensus by a fairly large number.

130,000 jobs expected to be lost, while figures came in at 11,000 lost. While this was much better then expected figures were a bit inflated. As Rob Carnell from ING states the following:

In our view, the only potential fly in the ointment of this labour report is how believable it is. Payrolls has been making very, very slow progress in recent months, and such a dramatic turnaround will raise eyebrows, and may not be taken at face value by many. An improvement in the payrolls series always looked on the cards from last month. But most of the labour market data in the run up to this release had been consistent only with a very small step forward, so we may need to see this backed up again next month before concern about the labour market can really be filed away as ‘last year’s worries’.

We are also slightly curious about the apparent surge in government jobs, which on revision have risen by more than 50K in the last two months. When state and local finances are in such a deep mess, even the Obama fiscal package is unlikely to have generated this rapid turnaround in the public sector. More believably, goods producing, construction and manufacturing jobs all saw continued large falls.

So I would tend to continue to be cautious to a continued pick up. I don't believe that with higher taxes, increased regulations, and health reform in the United States pipeline that the government is going to have some epiphany to creating mass jobs.

Temporary employment firms ran up on these numbers however a closer look still states that most businesses are still relatively concerned with where this economy is headed, and have remained very non committal to hiring more workers. With wage growth that continues to be depressed, there is no sign that companies will hire a dramatic number of workers if they can wring out increased productivity from their current staff which has been under utilized, with full production at only 75-80% of their overall capacity.

Wednesday, December 2, 2009

US Federal Beige Book Nov 2 2009

Employment, Wages, and PricesLabor market conditions remained weak since the last report, with further layoffs, sluggish hiring, and high levels of unemployment in most Districts. However, contacts in the Atlanta, Cleveland, and Richmond Districts reported that the pace of job cuts generally slowed in their regions, and most contacts in the Dallas District reported stable employment levels. Despite generally weak employment conditions, some signs of improvement were noted. For example, contacts in Boston reported that they were beginning to hire and reverse pay cuts or freezes that were implemented earlier in the year, and contacts in the St. Louis District reported that the service sector had started to expand recently. Expectations for the holiday season were mixed across Districts, with contacts in the New York and Dallas Districts reporting lighter-than-normal seasonal hiring and/or increases in the hours of existing employees, as opposed to hiring temporary workers, to meet the seasonal demand. On the other hand, most retailers in the Richmond District have hired the usual number of seasonal workers this year.

Districts generally reported little or no upward wage pressures, while some Districts noted upward pressure in commodity prices, and most Districts reported stable selling prices. Wages were largely reported to be holding steady in the Boston, Cleveland, Richmond, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts. Most Districts reported stable prices overall, although some reported higher input prices, largely for energy and other commodities used in production, with a limited ability to raise selling prices. Prices were reported as moderately lower in the Kansas City District, and downward price pressures were cited for some professional services and intermodal transportation firms in the Dallas District. Some makers of food products and chemicals in the Philadelphia District reported raising prices, and the prices of computer memory chips continued to firm in the San Francisco District. Retailers in several Districts indicated that they have managed inventory levels in an effort to prevent the steep price discounting that occurred last year, however, some promotional price discounting is expected through the holiday season.

Source: US Federal Reserve

Manpower MAN Valuation Dec 2 09

Source: Yahoo

I am not recommending a position for MAN. This is my own observation of the valuation for Manpower (MAN). Please do your own research regarding the investment of any equities or bonds.

It is really amazing the run that the temporary employment sector has taken. However is this run up justified when revenue is still down double digits compared to its year over year comps. And down significantly over a two year period.

Take note of the following :

- Manpower's p/e is at one of the industry's high. This stock trades at multiples much higher then the S&P. This as Manpower's revenue and net income have taken an extremely hard hit.

Manpower for the fourth quarter has already warned that their estimates will come in below estimates. This comes as analyst have not raised Manpower's estimates that far from the median. The notion that Manpower is unable to meet already low expectations speaks volumes with regards to the condition of the macro economy.

There's talk of how management has been managing Manpower beat the industry with its superior management. I tend to disagree when your revenue and net income have taken a significant hit for the past couple of years, along with the baggage of significant debt on its balance sheet. If we are in for another dip in the economy as a number of economist have suggested, credit conditions will become increasingly tight. Already there is worry concerning the 2010 pending tax increase, and pending health care costs forced by the government.

- PEG ratio. Normally a PEG ratio near 1 means that a stock will have a higher chance at out performing. However MAN is at a significant premium based on the PEG ratio alone. MAN trades at over 8x the mean, while the industry is trading at 3x multiples. This is a significant premium to pay for a company that has declining revenue, and net income, and increasing debt.

- P/B. The price to book looks cheaper compared to the industry. However when you look at the Manpower's historical p/e ratio it has not significantly traded higher to its current multiples. And that is with significantly higher sales, and revenue. S&P which had changed their metrics of evaluating MAN from P/E to P/B, downgraded their rating to SELL, and lowered it price target to 46.

So I would trend very carefully as employment will not rocket back with a vengeance. Consumers have not significantly increased their spending, and manufacturing has ticked down. There are many issues in the economy that continues to need to be resolved before employment stocks begin to look attractive again.

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