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.

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.