Five Stocks to Benefit from an Improving Jobs Market
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Forget about all the political noise for a second -- it’s not useful when it comes to investing in the stock market. A simple analysis of the cold hard numbers shows that the employment situation in the US is getting better, and the recovery is even gaining momentum. There is still a lot of upside room for labor demand in the long term, and these five stocks stand to benefit from it.
September's non-farm payroll report was quite solid: Payrolls came in right in line with estimates at 114,000 but the unemployment rate tumbled to 7.8% from 8.1% in August. The report also included an upward revision of the previous month's jobs numbers to 142,000 from 96,000. In addition, initial jobless claims for the latest week dropped by 30,000 from 369,000 down to 339,000, which was the lowest weekly reading since January 2008.
The American economy suffered one of its worst recessions in history during 2008-2009, and the recovery has been much slower than we would like, especially when it comes to employment. This has been painful, but it also means there is plenty of space for improvement over the next years, and it could have important implications for many stocks.
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 which should see increased demand from a growing jobs market.
More employment means bigger payrolls for the company´s existing and potential clients, and this makes ADP's services more convenient. Beyond basic payroll processing, ADP sells other outsourced human resources services, such as payroll tax administration, retirement plan administration, health benefit administration, and workers' compensation insurance service. When companies are hiring, their human resources needs become more complex, and ADP is there to provide an efficient solution.
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 give the company access to high-growth markets and also solidify its position as a global company which can satisfy customers' needs in different locations.
The other big player in the industry is Paychex (NASDAQ: PAYX), which offers similar services but is more focused on small and medium sized clients than ADP. This strategy mans that Paychex is more exposed to cyclical fluctuations in the jobs market; smaller companies are more vulnerable from a financial point of view and they tend to suffer more during recessions.
On the other hand, this also gives Paychex more pricing power and a greater ability to expand operating margins in a positive economic context. The smaller business segment is less penetrated and more dynamic than big corporations, so the company has some interesting growth possibilities ahead of it. Paychex pays a higher dividend yield than ADP at 3.9% versus 2.7% for its competitor.
Due to its higher growth possibilities and dividend yield, Paychex looks like the one with bigger potential for gains over the next years. On the other hand, ADP is safer because of its size advantages, economies of scale and wider diversification. Unless they get into a destructive competitive war with negative effects on profitability, both companies look well positioned for gains from an improving work market.
Robert Half International (NYSE: RHI) is another company which should benefit from higher demand in the jobs market. Revenue at Robert Half has benefited from temporary services as corporations fill immediate needs with temporary employees while reassessing longer-term hiring plans. Longer term, as the U.S. shifts from a goods-producing economy to one that is more service-oriented, the company's niche expertise in professional staffing could take advantage of this dynamic. Robert Half pays a 2.4% yield.
Manpower (NYSE: MAN) is involved in staffing services, and it has a strong competitive position in unskilled labor for the industrial and construction sectors. The company has a huge international presence: Manpower makes more than 90% of revenues outside of the US via its nearly 4,000 offices in 82 countries. The dark side of this geographical diversification is the company's considerable exposure to the complicated Eurozone region. The company yields a 2.4% in dividends, and it has some serious upside potential once the global construction sector starts showing sustainable improvement.
LinkedIn (NYSE: LNKD) should also benefit from an improving jobs market. The professional networking site makes more than 50% of its revenues from hiring solutions, so a stronger labor market would mean more demand for these services from corporations in the search for talent. Also, premium services sold to individuals could arguably do better too, as a more dynamic jobs market makes a premium subscription to LinkedIn a potentially more profitable investment.
LinkedIn is a very exciting company; it has found an unmatchable way to monetize its user base in a much more efficient way than Facebook and other social networks. The biggest drawback here is the price tag; shares of LinkedIn trade at a truly nose bleeding P/E ratio above 900. The company has remarkable disruptive potential, but there is little room for disappointment at current valuation levels.
Companies linked to labor demand have been suffering from a lackluster market for a long time, but the numbers are looking materially better lately. The jobs recovery is gaining momentum, and it has a lot of room to run, just like these stocks.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of LinkedIn. Motley Fool newsletter services recommend Automatic Data Processing, LinkedIn, Paychex, and Robert Half International. 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.If you have questions about this post or the Fool’s blog network, click here for information.