Temporary Staffing is Entering the "Bermuda Triangle" of Margin Pressures (pt. 1 of 2)
Adem is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Temporary staffing is about to get squeezed. This employment segment, actually employment altogether, is largely misunderstood by the market. With that said, it's not "disappointing" jobs numbers that will cause this pain.
Actually, most investors would be surprised to learn that temporary staffing does very well during periods of sustained, high unemployment like this one.
This unemployment percentage chart, provided by our friends at the Bureau of Labor Statistics, makes me chuckle.
With all the week-to-week consternation over jobs numbers, you'd think we'd had more than a 0.5% variance in unemployment over the past year!
But this trend is past due to change, and coupled with two other factors it could create a "Bermuda Triangle" of margin concerns for temporary staffing firms.
1). The unemployment rate will break its current tight volatility range. The last two weeks of unemployment claims have been at 362,000 and 344,000. The market thought one number was "good" and one was "bad," but they're both really an indicator of shocking consistency. At some point this will break, and claims will either drop below 350,000 consistently, dropping unemployment significantly, or they'll rise. Unfortunately, either outcome will cause short-term pain in temporary staffing.
2). Workers compensation costs are rising quickly
3). Gas prices are already high and headed higher
It's time to lock in your gains
If you own shares of TrueBlue Inc. (NYSE: TBI), selling is probably the last thing on your mind. But with the stock trading near a 52 week high, you should probably consider locking in your gains despite the stellar performance.
And the performance has been great. TrueBlue's Labor Ready brand has benefited from employers uncertainty, and wish for "non-committal" temp labor. EPS is up 16% year over year, and the company torched its most recent quarter (36% beat.) But beneath the surface, the "Bermuda Triangle" is ready to strangle TBI's near-term margins.
1). TrueBlue has had to drastically expand its business to keep up with the demand for temporary labor, recently acquiring MDT Personnel. This expansion puts the company in a tough spot should any change (good or bad) occur in the unemployment rate. If the rate decreases and employers get less "jittery," permanent placement will benefit, not temporary; TrueBlue, unlike most staffing companies, is 100% temp. If unemployment rises, TBI's expansion and the costs associated with it could be catastrophic. It's also worth noting that the companies CEO is said to be considering another acquisition "aggressively."
2). Labor Ready, TrueBlue's flagship brand, specializes in light industrial staffing and day labor. This business surges during times of manufacturing expansion and employer uncertainty-we've had both recently. The good times have a catch: an inherit risk to this business is its exposure to workers injury risk. With workers compensation rates set to rise sharply, TrueBlue will feel the impact more than most staffing providers because of the markets it serves.
3). Finally, gas prices will affect TrueBlue negatively, and I promise I'm not just picking on the company. This is actually an oft-missed margin killer to temporary staffing and light industrial type businesses. TrueBlue specializes in unskilled labor, at low wages. Increased gas prices will affect their employees more than most, and at some point wages will need to increase, if even slightly; their clients will not want to pick up the tab.
That is precisely why un-skilled labor is so hard to make a buck on. You're starting with tight margins to begin with, so any corner of this "triangle" slices your pie significantly. TrueBlue has mastered the climate wonderfully; don't stick around for the aftershock. To be honest, it could be worse for TrueBlue. In fact, if we were to cherry pick a staffing stock prime for a good ole' fashioned tumble, it would have:
1). Decelerating earnings over the past year. Better yet, let's give it declining EPS of 15% over the past 5 years
2). It would be trading near a 52 week high
3). It'd have-oh, say-over 70% of its exposure in the troubled European market
Yep, I'm talking about Manpower (NYSE: MAN), and it's definitely time to think about locking in your gains.
Manpower is a stock that attracts many investors because it's a very large, well-known staffing provider. The company is giving an admirable effort to transition its business offerings to the kind of "all-in-one" Professional Employer Organization (PEO) and Vendor Management Service (VMS) services that are needed to compete. But if the markets reaction to the recent Italian elections reminded us of anything, it's that you shouldn't be in a stock with too much European exposure, especially when it has multiple other red flags (as Manpower does.)
The potential landmines are all over the place. Manpower isn't transitioning out of Europe, it's doubling down. The company just completed a large acquisition of Workshop Holding AS, a Norway based contingency staffing provider. Further, Manpower's PEO services can't be compared to "neutral" services like Insperity's (NYSE: NSP) Workforce Optimization solution. Insperity-which I continue to love at these levels-offers its clients organizational planning, recruiting services, and employment screening, but their services aren't mutually exclusive.
A client can pick and choose which services they want from Insperity which makes it a much more compelling service than Manpower. Outside of its VMS tool, "TapFin," all of Manpowers services must come with Manpower employees; so if "temp business" isn't winning, nothing is.
The purpose of this post isn't to offend; it's to (hopefully) save you some money. Manpower is displaying some of the red flags that TBI has (like aggressive acquisitions) while embarking on new ones of its own. And with projected earnings of just $3.11 next year, Manpower would need to maintain a p/e of 18 just to keep up its current price; with no growth in site, this is less than likely.
On a Brighter Note
To be clear, while I feel that the temporary staffing market is due for a hiccup; it shouldn't be avoided altogether. But the easy money is largely made and from here on out, it's a stock pickers game. These stocks just can't all continue their torrid pace. Now that you know the potential risks, part two of this series will focus on stocks that will help you we navigate through the Bermuda Triangle.
Adem Tahiri has no position in any stocks mentioned. 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!