STAF, TBI, ASGN, CDI: It makes sense to play the consolidation wave of the staffing market
Globally, the staffing industry is still highly fragmented and one example of this fragmentation is the fact that the 50 largest US companies in the sector generate only 40% of annual industry revenues. Interestingly, the industry has remained this way despite strong undercurrents of consolidation in recent years. According to Duff & Phelps – a research organization following the sector – more than 100 acquisitions in the field were reported in 2012 and 2013, marking the highest level in the industry since 2007. Coming after the global financial meltdown, the recovery in mergers and acquisitions has run almost in parallel to the rebound in the broader US economy. However, the fact that there are over 32,000 staffing companies in the US is a great indicator of the still fragmented nature of the industry.
New York-based Staffing 360 Solutions, Inc (OTCBB: STAF) is working on a global consolidation model that involves the acquisition of domestic and international staffing organizations. The company has been making constant strides in the field with this selective acquisition model. Unlike private equity players, Staffing 360 Solutions has staffing operations and this background helps it in acquiring and integrating lucrative takeover targets. The management has publicly stated the objective of achieving $300 million in annual revenues over the next 2 years. This may sound a bit too ambitious considering the company reported a top line of just $20.2 million in the nine months of the current financial year. However, the company’s buy and build strategy is fuelling their exponential revenue growth. This can also be seen in the top line outlook of $26.8 million in the quarter ended May 31, 2014. The company has completed five acquisitions over the past 12 months. Operations of these targets are spread across the US and Europe.
At a time when majors are slowing
The optimism regarding the revival in staffing is shared across the players in the industry. Washington based TrueBlue Inc (NYSE: TBI) is another player in the temporary staffing industry that is growing at healthy rates. The company’s revenues increased 7.3% in the latest quarter, out of which 4% came from acquisitions. In line with this strategy, the company completed its acquisition of privately held SeatonCorp in the beginning of June, making it one of the largest players in industrial staffing market. However, industrial staffing is a low margin business and this is likely to impact margins going forward. Gross margins and operating margins already registered a decline in the latest quarter as a result of past lower margin acquisitions. Although the US economy is gradually coming out of the woods, this is not directly translating to stronger growth rates for TrueBlue. On the contrary, the company is witnessing top line growth in single digits now, down from double digit top line growth rates of last year.
Slowing growth in a growing industry isn’t a great combination and the market reacted accordingly, sending the stock down 13% from the high of $31 per share just before the earnings announcement. The market was also disappointed by the company’s third quarter earnings guidance which isn’t a great up shift from what the company reported in the second quarter. To be fair to it, the stock still gets positive recommendations from brokerage houses, although the upside looks capped from the current levels. This is not surprising since TrueBlue is pretty large with annual revenues of $1.67 billion in the last year and further growth is going to be incremental only.
On Assignment Inc (NYSE: ASGN) is another industry player which is benefitting from the uptrend in the economy and the labor market. With a market capitalization of $1.6 billion, On Assignment is a fairly established player in the marketplace. The company operates in the life sciences, healthcare and technology sectors which are usually underlined by higher margins. At 5% net profit margin, the company is certainly ahead of the pack when it comes to the staffing business. As such, it makes sense for the company to expand in these high margin and growing verticals and this is exactly what On Assignment did when it acquired CyberCoders Holdings, a technology-enabled national permanent placement recruiting firm, in December 2013.
The staffing industry generally starts to improve shortly after the low point of an economic cycle and this is when the company started its journey to profitable operations after posting a loss of $9.9 million in 2010. Since then, its profits have expanded substantially and stood at $84.5 million in 2013. In the same timeframe, the company’s revenues grew nearly fourfold from $438 million to $1.6 billion. Indeed, the company has done a remarkable job of maintaining and expanding margins; however, the top line growth in the most recent quarter fell short of not just street expectations but also of the goals set by the management. “While we are pleased with our overall performance for the quarter, our revenues were slightly below our estimates,” said Peter Dameris, President and Chief Executive Officer of On Assignment. Its quarterly adjusted income from continuing operations of $0.4 per share also turned out to be low from market expectations. Although it was up from the $0.3 per share reported in the same period of the previous year, it was way below analysts’ expectations of $0.52 per share. The market took it as an indication of slowing growth and as a result, the stock had a sharp gap down opening on the day following the earnings announcement. At current prices, the stock is valued at forward price earnings multiple of 12.8 which makes it a great buy, considering the recently approved $100 million share repurchase program.
Pennsylvania based CDI Corp (NYSE: CDI) offers talent acquisition, managed program staffing and recruitment process outsourcing services to its clients. This is another player, although small cap, which has seen its fortunes heading for the worst in recent months. The stock has corrected from its 52 week high of $18.9 per share in March to just over $14 now. Surprisingly, the stock’s correction comes at a time when its performance seem to be delinking from its not-so-glorious past. Although the company posted a 7.9% increase in revenues in the latest quarter, its gross margin declined a full 100 basis points to 18.6%. CDI Corp’s financial and operational performance over the last three years has largely remained stagnant, alluding to the challenges faced by being too focused on specific verticals. In fact, top line and bottom line registered declines last year.
Industry dynamics favor aggregators, especially focused ones
Despite the current headwinds to the wider economy, reflected in the average hiring and employment figures, it is not a stretch when analysts forecast that the staffing industry will continue to grow over the next several years. Starting from a low base, Staffing 360 Solutions is in a great place to take advantage of this recovery and the fragmented nature of the industry. Staffing 360 Solutions’ management believes its consolidation strategy will help it grow to the stature of bigger industry competitors like TrueBlue Inc (NYSE: TBI) and Robert Half International Inc (NYSE: RHI) over time.
While it remains debatable if the company can ramp up operations to annual revenues of $300 million over the next 24 months or not, investors stand to gain substantially even if the company comes anywhere close to it. If the stock price movement of other established players over the last 4 years is any indication, Staffing 360 Solutions can turn out to be a multi-bagger. As of now, the company is not making profits given its limited operations. However, costs as a percentage of revenues are certainly coming down as it expands through accretive acquisitions. The company specializes in the high margin cybersecurity space and while industry diversification is in cards, the company is unlikely to trade off profitability with top line growth.
While TrueBlue and On Assignment are great examples of revenue growth and margin optimization respectively, they are clearly extreme ends of the staffing spectrum. Against this backdrop, Staffing 360 Solutions comes across as a balanced play, although its stated objective entails a revenue ramp up over the next couple of years. Sure there are going to be challenges but the company appears well prepared to address the challenges. For one, the company’s approach of financing the acquisitions through a combination of cash, company shares, and performance incentives is a cost -effective way of growing rapidly and leveraging its position. Staffing 360 Solutions also recently completed a private offering of convertible bonds with total gross proceeds of $4 million. Proceeds from the offering have been earmarked to partially pay for a recent acquisition while the remaining funds will be used to finance the next level of growth.
Finally, the company has experienced management in place which is capable of navigating the company through this rapid expansion phase. Staffing 360 Solutions’ Executive Chairman Brendan Flood spent 7 years at Hudson Global Inc (NASDAQ: HSON) in various roles in Europe and the United States. He played an instrumental role in taking Hudson Global public in 2003. During 2004 and 2005, Flood also led Hudson North America to profitability after several loss-making years. In the past, Flood has handled Monster Worldwide’s Americas operations which amounted to $1.8 billion of annualized revenues. CEO Matt Briand adds to this expertise with over 17 years of staffing industry experience from various recruitment, sales, management and executive roles. CFO Jeff Mitchell brings significant finance and M&A experience to the team, having consummated over 40 acquisitions in the staffing industry. Last but not least, Vice Chairman and President, Alfonso J. Cervantes adds considerable depth from a capital formation perspective, with over 30 years in the public markets and having spearheaded the $15 million of financing that Staffing 360 has used to grow to over $100 million in annualized revenues over the past 12 months.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.