Earnings 4Q 2009

A number of large US employment and temporary employment agencies report.

Kelly Services (KELYA) Feb 5 2010 4th quarter and full year 2009
Manpower (MAN) Feb 2 2010 4th quarter and full year 2009
Monster Worldwide (MWW) Feb 3 2010 4th quarter and full year 2009
Robert Half International (RHI) Jan 28 2010 4th quarter 2009

It will be an interesting earnings period for these four companies. I'm sure a number of them may surprise to the upside and beat consensus, however growth remains very much muted in the overall US economy. Emerging markets may face hurdles as their recovery starts to overheat and may need to take the foot off of the petal with their stimulus policies.

Slack hiring

After last week's payroll report hiring remains slack.

• Temporary employment has been increasing. However as an investor beware of the red flags in terms of valuations. The valuations traded by these temporary & human resources are out of kilter with their actual growth. A large number of these stocks have continued to see negative growth. Structural changes in employment take many years before they can be corrected.
• Manufacturing employment continues to decline. This hurts companies such as Manpower (MAN) due to their heavy emphasis in the manufacturing sector.
• The average work week remains at 33.2 hours. Hence if there is a remote pick up in the economy, capacity utilization, along with current work staff will grow. Rather then hiring massive number of temps. Although short term temps look attractive due to the lack of benefits paid out to a majority of temps, temps create low morale and weak productivity on a longer term bases.

Because of the weak outlook by companies for revenue growth open positions, especially permanent positions will be weak at best.

Small Business Sentiment Drops Amid Weak Holidays

The sentiment of U.S. small business owners stalled in December, hurt by weak sales and worries about government policies, according to a survey releasd on Tuesday.

The National Federation of Independent Business said its small business optimism index fell for the second straight month, dropping 0.3 point to 88.0 in December.

"Small business owners are not in a hiring mood because customers are not in a spending mood, the group said. Owners continued to liquidate inventories and weak sales trends gave them little reason to order new stocks."

Source: Reuters

Unemployment rate remains at 10% Dec 2009

With the release of today's numbers the recovery in the jobs market continues to be muted.

• Nonfarm payrolls fell by a seasonally adjusted 85,000 in December.
• Number of discouraged workers rose by 287,000 over the year to 929,000.
• Total hours worked in the economy were unchanged in December. The average workweek was unchanged at 33.2 hours, near the record low.
• An alternative gauge of unemployment, which includes discouraged workers and those forced to work part-time, rose to 17.3% from 17.2%.

Citigroup upgrades Manpower Staffing and Robert Half Staffing Jan 06 2010

SP500 P/E Ratio

"Citigroup analyst Ashwin Shirvaikar issued a bullish note on the staffing sector early Wednesday, raising ratings on Robert Half International Inc. and Manpower Inc. to buy from hold. He cited "improving signs in the temporary employment sector over the past several months" as well as "optimism on the long-term secular trends in the staffing market" for the moves."

Interesting call by Citigroup Research this morning. I agree that layoffs are steady declining with the latest data. However I am still cautious that valuations have gotten ahead of itself. I'm more concerned with the valuations as pointed out in prior posts of Manpower.

• - Manpower continues to trade at a very rich premium at 1.78 P/B. A price to book near one means value. Clearly the market and speculation from analyst believe that Manpower will return to its glory days such as the Citigroup's analyst boosting its price target to 69. As seen in the price chart MAN is trading above it normalized trading range. MAN has traded well above the growth period during expansion, besides the recent credit induced bubble in 2007. The analyst clearly believes that the economy will produce jobs at such a torrid pace that valuations will be fair. I think we have to remember that permanent jobs provide higher margins. Temporary positions do not provide the valuations that would prop up multiplies of close to 90+x earnings.
  
• - Manpower is trading at a clip of 90+x current p/e, 83x this year's earnings, and 52x next year's earnings. Compared to the SP500 and Nasdaq p/e ratio, Manpower (MAN) is significantly overvalued.
  
• - Revenue continues to be in a significant decline from its high of 2007. While debt levels have continued to rise. For this one reason alone I am a bit more positive on Robert Half (RHI) due to its very minimal debt. Any future shocks in the economy will hurt Manpower's cash flow, and cause another possible downgrade in its credit rating.
  
• - Challenges remain with health reform, higher taxes, quantitative easing of liquidity later this year will continue to crimp hiring by small businesses which produce well over 80% of the jobs in the US.
  
• - Manpower's largest market France has stated that they are looking to reduce their debt levels to the EU standard. The stimulus package that they have provided has provided a slight uptick in their GDP. However challenges remain with the continued contraction in the European markets, especially Eastern Europe.

And last but not least Manpower did warn during their 3Q conference call
that they have warned for their 4Q. Irrational exuberance continues in this
market while actual demand from consumers, and tight and inefficient credit
markets persist.

Manufacturing Up, Jobs Continues To Be Down

Unfortunate as production in the US picks up, jobs continues to be a sore spot for the economy. The following chart via Clusterstock continues to point to questions that I've had for Manpower (MAN) which is heavy in the manufacturing sector.

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