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What Changed At Robert Half? Jefferies Upgrades Stock Just One Week After Reiterating Post-Earnings 'Hold'

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In a report published Friday, Jefferies analyst Dan Dolev upgraded shares of Robert Half International Inc. (NYSE: RHI) to Buy from Hold with a price target raised to $63 from a previous $59 as the company's strong fundamentals suggest that concerns over a maturing temp cycle are "overblown."

What's particularly noteworthy is the fact that exactly one week ago the analyst reiterated a Hold rating following the company's second-quarter results and third-quarter guidance.

In Dolev's Hold reiteration note, he noted that Robert Half's second-quarter print showed a deceleration of revenue in temp SDCC unit following six consecutive quarters of accelerating growth.

Dolev said that temp SDCC revenue growth decelerated by 320 basis points to +11.3 percent in the quarter, hurt by slowing growth in all four temp staffing segments, most notably a 940 basis point deceleration in RH Management Resources, which the company attributed to the project-oriented nature of the business.

Nevertheless, Dolev stated that he shares management's "bullish" tone on its end-markets, but the stock's under-performance is "somewhat peculiar."

"Between January 1st, 2014 and December 31st, 2014, FY15 EPS estimates grew +13 percent and the stock grew +39 percent absolute. +28 percent relative," Dolev wrote. "However, since the beginning of the year, FY16 estimates have only re-rated by +6 percent. Can EPS re-rate towards a $4+ peak? We are optimists, but also note that at the high-end, 3Q EPS guidance implies a ~200bps deceleration to +19 percent, which marks the first quarter of EPS growth below +20% since 1Q14."

Why The Change Of Mind?

In Dolev's upgrade note, the analyst attributed the stock's poor performance towards investor concerns including the company's deceleration in temp SDCC growth.

Taking a macro approach, the analyst worked under the assumption that Non-Farm Payroll continues to grow at around 200k/month, while month-over-month temp growth remains below its long-term median of around 7 percent. Meanwhile, a 6 percent reading points to 5 to 6 percent year-over-year temp growth in fiscal 2016.

Coupled with a potential acceleration in bill rate growth from 4.7 percent in the second quarter to 6.0 percent by the end of fiscal 2016 (representing the mid-point of management's range of 5 to 7 percent), the analyst concluded that temp SDCC growth is set to re-accelerate sometime throughout fiscal 2016.

Dolev estimated that temp growth re-acceleration could drive 4 to 10 percent upside to fiscal 2017 consensus revenues. When combined with an estimated 80 to 200 basis points of gross margin improvements and an 80 to 130 basis points of temp operating leverage growth, the company can see its fiscal 2017 earnings per share in a range of $3.97 to $4.81 – 18 to 44 percent ahead of current consensus estimates.

Finally, Dolev is "conservatively" assuming Robert Hall will continue growing its dividend by an average of 13 percent annually in addition to "modest" share repurchases continuing through 2017.

Latest Ratings for RHI

DateFirmActionFromTo
Nov 2016RBC CapitalDowngradesOutperformSector Perform
Oct 2016William BlairDowngradesOutperformMarket Perform
Oct 2016Credit SuisseDowngradesNeutralUnderperform

View More Analyst Ratings for RHI
View the Latest Analyst Ratings

Posted-In: Dan Dolev Jefferies Non Farm Payroll Robert HalfAnalyst Color Upgrades Price Target Analyst Ratings

 

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