Low Debt High ROE Stock Deserving of Rich Valuation
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The market has rewarded Trueblue (NYSE: TBI) for its industry leading ROEs, with the stock price rising by 28% year-to-date. With its geographical reach and longevity in the industry, TrueBlue is well-positioned to benefit from regulatory and technological drivers such as The Affordable Care Act, and the prevalence of mobile usage.
Headquartered in Tacoma, Washington and listed in 1995, TrueBlue is a leading provider of blue-collar staffing, serving more than 100,000 businesses in the retail, service, wholesale, manufacturing, transportation, aviation, and construction industries.
Moats that matter
While the blue collar staffing industry is typically perceived as one with low barriers to entry, TrueBlue has differentiated itself from its competitors in terms of longevity, specialization and scale.
Firstly, given the boom and bust nature of the industry, more temporary staffing companies resume operations or are started during periods of strong economic growth to ride on the increased demand for labor. In contrast, smaller temporary staffing companies without the requisite scale tend to either go out of business or be acquired by other bigger players. Beginning operations in 1989 under the name Labor Ready, TrueBlue has the longevity to create brand equity in the mind of customers and also seize opportunities to expand through consolidation during bad times.
Secondly, staffing is an industry-specific business, with different industries having their specialized staffing requirements. TrueBlue has branded its industry specific offerings differently, e.g. Spartan Staffing for light industrial, PlaneTechs for mechanics and technicians for the aviation and transportation industries, and Centerline Drivers for dedicated and temporary drivers etc.
Lastly, while not exactly like convenience stores, TrueBlue’s geographic reach gives it a competitive advantage over competitors in executing its local sales strategies. On top of national service centers, It has a network of more than 600 branches in all 50 states, Puerto Rico and Canada, with customer on-site locations typically dedicated to one customer, to retain its strength in marketing and servicing small-to-mid-sized businesses at the local level.
According to a September 2012 Staffing Industry Analysts report, the temporary help segment is expected to achieve 106% of their 2007 peak revenues during 2013. TrueBlue is likely to benefit from several regulatory and technological drivers in the near future.
The Affordable Care Act, a United States federal statute signed into law by President Barack Obama in March 2010, stipulates that organizations with more than 50 full-time employees that don't offer affordable health coverage will have to pay a penalty, calculated on a per full-time worker basis. More companies are likely to hire more temporary staff to avoid either offering health coverage or paying a penalty.
Technological advancements in the form of mobile solutions, such as texting, will increase the speed and efficiency of job matching for temporary work, in particular those short notice assignments. Online/electronic job placement and social media recruiting also represent future areas of growth for TrueBlue.
Manpower is the most geographically diversified of the pack with more than three-quarters of its revenue generated outside the United States, while Kelly Services is expanding its presence in emerging markets such Asia and Latin America; TrueBlue is still very much U.S. centric. They also have strengths in different sectors. Manpower is known for its staffing services in the construction sector; while professionals and technicians look for Kelly Services.
The market values all three stocks at seven to nine times trailing twelve months EV/EBITDA, while forward P/E sets them apart based on their ROE metrics. TrueBlue trades at a forward P/E of 21, while Manpower and Kelly Services trade at 17 and 12 times forward P/E respectively. TrueBlue delivered the highest ROE of 10.7% for the last twelve months, compared with ROEs of 7.9% and 6.8% for Manpower and Kelly Services. Also, while all three companies have relatively strong balance sheets with gearing below 30%, TrueBlue stands out with negligible debt of $34 million. While it was previously debt free, TrueBlue took on $34 million of debt in 2013 with the acquisition of MDT, the third largest general labor staffing firm in the U.S.
TrueBlue’s longevity, specialization and scale differentiates it from its competitors and this is reflected in a industry leading ROE above 10% and a forward P/E of 21. TrueBlue is justified trading at such a premium valuation, given its competitive advantage over peers leading to a higher ROE; strong balance sheet; and regulatory and technological growth drivers for the temporary help segment.
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