Sector Updates

With recent release of 2Q 2010 earnings, I've like to touch on a few points.

It was good to see that revenue ticked up for most of these corporations. Although, I'm still cautious with the early developments of austerity measures in Europe, and the looming regulations and tax regulations in the United States, revenue did improve for the staffing sector.

Profitability does leave something to be desired, until there robust action in terms of revenue that is sustained in a normalized recovery, I am cautiously optimistic on the sector.

RBS analyst Bob Janjuah states his views

RBS analyst Bob Janjuah was quite temped in his views of the global growth story.

Bob Janjuah states that a massive turnaround in corporate behaviour in leverage, capex, investment, hiring and spending binge is extremely unlike for now and for the rest of this year.

This is a pretty honest assessment after all the rose colored glasses calls of a buoy hiring landscape for the staffing firms. However, premenant placement has barely budged from historical levels, and consumers continue to be selective on their purchasing behavior.

The U.S. also revised its GDP downwards to 3.0% rather than bullish estimates from firms such as Goldman Sachs of 3.7%. Besides that unemployment claims also missed estimates.

Robert Half RHI Q1 2010 Earnings

Robert Half International (RHI) reported Q1 2010 earnings. Robert Half International reportedly missed earnings of .05 vs. analyst estimates of .06.

Revenue was also light of estimates. Q1 2010 revenue $737.2M vs. analyst consensus of $750.76M. Robert Half International although it sustained through the down draft of the financial crisis continues to face slack demand in all components of the company.

When valuations have risen as fast as they have, and demand has been lukewarm from the cyclical bottom, these temporary, and staffing firms continue to produce fairly weak margins.

I continue to see this sector as overvalued relative to the S&P's earnings.

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.

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.

Unemployment compensation tax skyrocketing

Unemployment compensation tax has not been a widely discussed issued among the rising unemployment rate. States in the US are having difficulties paying unemployment claims due to the significant rise in unemployment. States have to resort to bumping up compensation tax such as an example with Florida, which has to increase unemployment tax by 12x from $8.40 for every employee to $100.30.

There are 33 states which will increase their compensation taxes next year. This will make small businesses which continue to be cautious with regards to credit, and expansion will now find hiring or retaining employees more expensive. Although contract and temporary workers may see a slight uptick, these positions will likely be mute to the unemployment rate, and claims will continue to be at elevated levels. Without sustained job creation and longer work hours for current employees, these temporary positions will likely see very minimal increases. Hence, why I've been very cautious with regards to investing in these employment services stocks.

Manpower 3Q 09 better then expected; 4Q 09 Warning

Manpower reported earnings .09 better then First Call estimates, and revenues fell 26.0% year over year at $4.19 billion versus 3.95 Billion consensus.

Manpower issues downside guidance for the 4th quarter. It sees EPS of .17 - .27 vs. .28 consensus.

"We continued to experience sluggish demand for our services as the labor markets throughout the world were hampered by lack of demand for companies' products and services."

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Pretty lackluster report. Margins was lower then anticipated, cost controls were not as strong as they could have been. Debt continues to restrict MAN from making sound investment.

Took some one time charges, which wasn't advantageous to their bottom line.

Guidance was very weak compared to the comps, which I have been very vocal that even after today's drop in stock price is dramatically overvalued.

-Dividend.com advised it's readers to sell prior to earnings.

-S&P Research advised its clients to sell MAN, after Manpower announced its earnings.

Near term this stock should continue to fall, as their just reported quarter is historically their strongest of the year. The 4th qt. may become seasonally weak, which they have already warned in their guidance. Guidance was extremely disappointing considering that most analysts had very tepid estimates, and didn't raise much in terms of their estimates as Manpower's stock appreciated. Still MAN is having continued operating problems. Since 2007, its earnings, net income, and EPS has declined year o/ year.

Restrained Hiring and Moderation in Job Loss Expected for Q4 2009

"CareerBuilder and USA TODAY’s Q4 2009 Job Forecast shows that, while employers are feeling more optimistic about the economy and job market, the majority plan to keep their staff levels the same for the remainder of the year. Continued moderation in job loss coupled with a hesitant approach to hiring is expected for the fourth quarter, according to the survey, which was conducted by Harris Interactive® from August 20 to September 9, 2009. More than 2,900 hiring managers and human resource professionals across industries participated nationwide.

Companies are switching their focus from cost containment to growth. Employers who have instituted pay cuts or layoffs in the last year are reporting that they have begun to restore compensation levels and rehire employees," said Matt Ferguson, CEO of CareerBuilder. "While these are positive indicators, the pace of hiring will remain restrained. It will take time to rebuild the confidence needed in the nation’s economy to trigger more robust recruitment programs."

Source: CareerBuilder

Manpower Earnings Q2 2009

Earnings came out. The earnings was fair considering the environment. Stablization in the US, Italy, and France. Weakness in Australia and some other European nations.

Manpower has done a fairly good job containing cost, and has been buoy by Right Management this quarter. However, although third quarter wise is suppose to be Manpower's strongest quarter; margins will come down due to Right Management seasonal decline.

From AP:

"Co issues in-line guidance for Q3, sees EPS of $0.07-0.21 vs. $0.18 consensus."

From Zacks:

"Management provided a cautious outlook for the third quarter of fiscal 2009. On a consolidated basis, it expects revenues to decline between 29% and 31% in reported dollars (24% to 26% in constant currency)."

So forward guidance is a bit iffy on the EPS front. I'm still a bit tepid with the valuations of Manpower when its peers are not receiving as much of a premium as MAN.

P/E excluding extraordinary items at 66x earnings as of July 24, 2009.

While the PEG is over 11x.
Net Profit Margin at 0.03%

Besides that as the chart presents that this stock is well overbought. When net income is down as much as it has the run up has not been justified. Even as they beat estimates this does not reflect a rebound in employment.

I find this extremely expensive vs. its peers. The stock is pricing in a recovery. If for some reason there is a "W" shaped recovery MAN is going to decline. Remember that employment is a lagging indicator to a recovery.