Margins Contracting at Robert Half

We maintain our Hold rating on the shares of Robert Half International (RHI - Analyst Report). Although the company benefited from double-digit revenue growth in 2007, concerns remain about an economic slowdown negatively impacting staffing companies like Robert Half. The operating margin is contracting, primarily due to weak international operations at Protiviti, which embarked on an aggressive global office expansion program at the same time revenues came under pressure from reduced client demand for compliance-related employees.

Focus on better corporate governance and internal controls in financial reporting created new accounting and finance jobs, which in turn benefited Robert Half. The company is expected to continue benefiting from favorable demand for financial services professionals. Management believes that the company should benefit from a shift to the higher margin Permanent Placement business from the Temporary Placement division.

Robert Half is currently trading at 13.1 times trailing 12 month earnings. The company is quite cyclical with EPS dropping down to $0.01 in 2002, resulting in a 1,800 P/E ratio when the stock was most attractive. Therefore, the stock should be valued on a price-to-sales (net service revenues) basis. Robert Half currently trades at 0.80 times trailing 12 month net service revenues (sales). The target of $27.00 is based on a 0.90 P/S ratio on 12 month trailing net service revenues.

Read the full analyst report on RHI