These Stocks Could Benefit From Better Employment Numbers
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We have seen an improving employment picture in the past couple months, and the recently released jobs report is confirming the trend. The US economy added 243,000 jobs in January, with the private sector responsible for 257,000 new jobs. Both the numbers were well above expectations of 140,000 and 160,000, respectively. Unemployment rate decreased to 8.3% from 8.5% in December, and other indicators like hourly earnings and the average workweek also showed positive signs.
The employment situation is still well below what would be considered ideal or even desirable, but it is improving. If that trend continues it will have important consequences in the economy and financial markets in general, but also a more specific effect on companies that are directly related to the employment market.
Automatic Data Processing (NASDAQ: ADP) is a clear example of a company that stands to benefit from a better employment situation. The company has a strong position in businesses like payroll management, benefits administration and human resources, activities that should see increased demand from a better jobs market.
ADP has been expanding rapidly through acquisitions over the last few years, a strategy that has some risks but also makes a lot of sense in an industry in which economic scale, cost advantages and geographic reach can be important assets. The firm recently acquired Ma Foi Consulting, an Indian human resource and payroll management company. These kinds of acquisitions help ADP entering high-growth markets and also expanding its position as a global company that can satisfy customers' needs in different locations.
ADP pays a 2.9% dividend yield and has a really good track record of increasing dividends, even during the last recession. Valuation looks reasonable considering its dividend yield and a forward P/E ratio of 18.3. Investors looking for a solid way to play a recovery in the jobs market could consider ADP as a possibility.
A higher dividend yield can be obtained by investing in Paychex, Inc. (NASDAQ: PAYX), one of ADP´s main competitors, although a much smaller company and also more focused in servicing medium and small businesses. Paychex yields a very attractive 4% dividend. It doesn´t have the same trajectory of dividend increases as ADP, but could offer more upside potential if the employment situation in the US keeps getting better: Paychex offers more exposure to small businesses and is also more focused in the US so it's more leveraged to the US job market.
Robert Half International (NYSE: RHI) is another company that should benefit from higher demand in the job market. This staffing and risk consulting services provider has a considerable exposure to the demand of accounting and finance professional services and also pays a 2% dividend yield. Dividends have been increasing every year since 2004, so that provides some support for the stock.
Robert Half trades at a forward P/E ratio of 17.3, which is not excessive. Analysts are predicting good times ahead for this company, since they are expecting a growth rate of almost 23% annually for the next five years. If that scenario materializes, investors in this stock should achieve nice gains.
Manpower (NYSE: MAN) is another company involved in staffing services, but more focused on unskilled labor for industrial and construction sector, the kind of jobs got really hurt due to the economic situation. The company has low profit margins and even lost money last year, something that didn´t happen to other more stable companies in the staffing business.
But things could be getting better: Manpower reported better than expected earnings last quarter and the stock is quite cheap in terms of forward P/E with a ratio near 12.5. The dividend yield is a modest 1.7%. Manpower is a more risky alternative, but could see large gains if the scenario for the job market keeps improving.
Shares of LinkedIn Corp. (NYSE: LNKD) could also see some benefits from an improving labor market. This social network for professional contacts and job searches has many long-term growth drivers, but an improving situation for jobs clearly increases demands for its services in the short and middle term. LinkedIn is a very speculative play, trading at a forward P/E of almost 142. This is not a position I would recommend to long-term value-conscious investors.
Motley Fool newsletter services recommend Automatic Data Processing and Paychex. The Motley Fool owns shares of LinkedIn. acardenal has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.