Temporary Employment Trends Favor This Company
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A temp agency that can supply workers who possess rare skills that employers need has a valuable competitive advantage right now. On Assignment (NYSE: ASGN) provides scientists, engineers, IT professionals, and health care professionals to its clients. The company does compete with established temp agencies that have moved beyond their traditional specialties such as providing production line workers and low level clerical staff. On Assignment benefits from both recent growth in the temp worker market and a trend toward temp employment in fields that once used more salaried staff, although it's not a cheap stock at the moment.
On Assignment delivered especially strong recent results because of higher demand for specialized temporary professionals, as the company reported 139.1% sales growth and 124.4% earnings growth in its latest quarter. On Assignment's IT and Engineering division provided 44.7% percent of its sales in 2011, according to the company's 2011 annual report. The company's Healthcare division provided 15.8% of its sales that year, while its Life Sciences division produced 26% of its sales and its Physician division provided 13.5% of its sales.
Robert Half (NYSE: RHI) also demonstrated the power of a good niche recently, as the temp agency reported 37.5% higher income for the quarter driven by 6.2% higher sales. Robert Half has a particularly strong presence in accounting, auditing, and related fields, although the company supplies temps who have a wide variety of skill sets. All temp agencies have a cyclical advantage right now, because employers that need to add staff remain wary about another downturn.
Robert Half provides some evidence that this business cycle could turn out even better than past cycles for temp agencies. The 4Q 2012 Robert Half earnings call transcript at Morningstar explains that temp jobs now make up 13.2% of jobs in the United States, but in the recovery period after the last recession temp jobs made up 6.5% of total United States jobs. These figures definitely look good for On Assignment's growth prospects.
On Assignment experienced accelerating growth in 2012. The temp agency achieved 36.3% sales growth over the last year, much faster than its five year growth rate of 6.4%. Other temp agencies also experienced better recent results. Robert Half achieved 19% sales growth in the last year, but over the past five years the company has a negative 4.1% sales growth rate. Manpower (NYSE: MAN) also had a better year in 2012, achieving a one year sales growth rate of 16.6% and a five year growth rate of 0.8%. These temp agencies' historical growth rates don't justify huge premiums, though. The bull case for On Assignment depends on growing markets for temporary scientific, medical, and IT professionals, although the temp agency could also boost its income with higher margins.
Temp agencies often have relatively low margins, although a popular niche can help a firm achieve better results. On Assignment's scientific staffing services produced a 3.9% profit margin that beat some other temp firms, although Robert Half achieved a 5.1% profit margin itself. Kelly Services (NASDAQ: KELYA) reported a 1.2% profit margin, and Manpower reported a 1% profit margin. Manpower did implement cost cutting initiatives recently because of weak demand for temporary workers in European nations, reported Bijay Anandoth Koyitty at Reuters. On Assignment may have decided to focus on growth instead of maximizing profits, though.
On Assignment stock does sell for a premium right now. On Assignment had a fairly pricy forward P/E of 20 and a PEG of 1.17 on January 31, 2012. Kelly Services had a significantly cheaper forward P/E of 10 and a PEG of 0.74 on the same date, although Kelly did just miss on earnings. The Fool's Travis Hoium explained that Kelly earned 33 cents per share while analysts expected 34 cents, which resulted in a 12% share price drop. Investors might have overestimated Kelly's prospects because of Robert Half and Manpower's results.
Robert Half and Manpower look cheaper than On Assignment under one metric, but more expensive under another metric. Robert Half had a forward P/E of 17 and a PEG of 1.22 on January 31, 2012, while Manpower had a forward P/E of 14 and a PEG of 1.51 on the same date. Robert Half, Manpower, and Kelly Services do pay dividends though. Robert Half and Manpower both offer a 1.7% forward yield, while Kelly offers a 1.2% forward yield. On Assignment's strong growth figures show where its money is going right now.
On Assignment's specialized staffing business already produced very strong recent results. The market for all types of temp workers has expanded, and the company's niche focus can help it maintain its margins. The sector remains subject to cyclical factors though, so investors should watch other temp agencies for signs of a slowdown. Fools give On Assignment a four star CAPS rating, also a positive sign. On Assignment looks ready for more growth right now.
enovinson has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!