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This Staffing Firm Is on the Mark

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It has been a hard slog for the global staffing industry over the past few years, as the U.S. financial crisis and slow subsequent recovery has caused companies to remain cautious in their growth ambitions and hiring plans.  Despite creating 1.8 million jobs in 2011, the official U.S. unemployment rate remains around 8% and various government entities have more job cuts ahead in order to get their fiscal accounts in balance.  While China and parts of the Asia Pacific region continue to produce solid economic growth, Europe has been a problem as debt-laden members of the EU deal with their excessive debt levels.

Global Reach Not Helping

In FY2012, the two major global staffing companies based in the U.S., Manpower Group (NYSE: MAN) and Kelly Services (NASDAQ: KELYA), have posted weak results despite geographic networks that span the globe.  Both firms were founded in the late 1940’s and have built mass market businesses that include temporary staffing, training, workforce consulting, and outplacement services.  The combination of stagnant revenue growth and high maintenance costs of worldwide branch networks has resulted in very low profit margins and weak stock prices.

In FY2012, Manpower has reported decreases in revenues and operating income of 6.3% and 22.2%, respectively, versus the prior year period.  While the company placed 3.5 million people in jobs throughout the world, its revenues declined in each of its geographic segments.  Manpower’s large exposure to Europe, with 63.1% of total sales, has proven to be a definite disadvantage, as the segment's sales fell 9.8% compared to FY2011.  Despite operating efficiencies from the company's recent restructuring activities, substantial slack in its recruiting system resulted in a 2.0% operating margin for the period.

Similarly, Kelly Services has generated weak revenue growth in FY2012, reporting a decline of 1.9% compared to the prior year period.  Despite generally higher pricing for its services, the company had fewer contract placements in all of its operating segments, especially in the Asia Pacific region where it exited certain unprofitable relationships.  However, Kelly Services' restructuring initiatives finally had a positive effect, leading to a 38.9% overall gain in operating income.  While further margin improvements are likely for both companies, sustained increases in profits hinge on higher levels of economic growth in their core developed markets.

Beating to a Different Drum

Investors who want to invest in the staffing business should skip the low-margin, mass market companies and look at the niche players who focus on growing industries.  One of the best positioned staffing companies, with strength in healthcare and technology, is On Assignment (NYSE: ASGN).  Founded in 1985, the company provides contract and direct hire staffing services through 192 offices in the U.S. and certain international markets.  On Assignment has pursued expansion primarily through the acquisition channel, with 13 purchases since 1985, including U.K.-based Cambridge Group in 2010 and Belgium-based Valesta in 2011.

The company’s strategy has been to focus on a limited group of high-growth industries where it can gain a competitive advantage through staffing expertise and the formation of long-term client relationships.  On Assignment continues to focus on the life sciences industry, which was its initial focus and still generates 26% of total revenues.  However, the company has also built leading positions in healthcare, technology, and engineering areas that are expected to have positive employment trends over the next decade.

In its latest fiscal year, On Assignment reported revenues and adjusted operating income of $597.3 million and $44.4 million, increases of 36.4% and 113.1%, respectively, versus the prior year.  The company’s revenue growth benefited from increases in each of its segments and its low exposure to weak international markets, which generated only 11% of total sales during the period.  While gross margins slipped slightly versus the prior year, operating efficiency reached record levels due to generally strong pricing for its services and double digit gains in contract placements.

Looking Ahead

In FY2012, On Assignment has produced solid results once again, with increases in revenues and adjusted operating income of 92.4% and 113.7%, respectively, compared to the prior year period.  The company has enjoyed strong organic revenue gains across its segments, as the U.S. economy has continued to produce over 100,000 jobs per month in 2012.  On Assignment also made a big bet on the technology sector, with its $611 million acquisition of Apex Systems earlier this year.  While the acquisition was fairly expensive and leveraged the company’s balance sheet, it should reduce On Assignment’s exposure to the heathcare sector, which will be undergoing changes over the next few years as the federal government implements its 2010 landmark health care law.  Despite its above market 23 P/E multiple at recent prices, investors need this recruiter on their watchlist.


rghanley owns shares of On Assignment. The Motley Fool has no position in any of the stocks mentioned. 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!

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