Robert Half Facing Challenges

Robert Half International Inc. (RHI - Analyst Report) reported first quarter results after the market close yesterday. Quarterly earnings declined 87% year-over-year to $0.06 per diluted share and were $0.02 below expectations.

The company’s results are being impacted by global financial crisis, difficult labor markets and weakening economies as the company’s clients became more cautious with their hiring actions throughout the quarter. Net operating service revenues declined 32.9% to $823 million with all segments reporting lower revenues.

The overall consolidated gross margin declined 600 basis points (bps) to 35.7%. Robert Half’s overall consolidated operating margin declined 748 bps to 2.0%. However, cash flow from operations was $48 million, and the company repurchased 506 thousand shares for $9 million during the quarter.

Despite financial results being weak during the fourth quarter of 2008 and the first quarter of 2009, the company’s financial condition remains solid. Despite the economic uncertainty affecting the company, Robert Half is generating positive cash flow even in these difficult economic times.

For example, during the last US recession (2001 and 2003), Robert Half International generated over $550 million in cash from operating activities. The company has only $1.9 million in debt (actually notes payable and other indebtedness, less current portion).

All of company’s staffing operations are being negatively affected by the weak labor market. The permanent placement division has historically been the most sensitive to economic downturns. The overall staffing gross margin declined 425 bps due to a lower mix of permanent placement revenues relative to temporary and consultant staffing.

Though global economic conditions are challenging, management indicated that the consulting arena (especially functions that address cost controls, IT security, bankruptcy, and restructuring solutions) are growing. In addition, it is possible that in the effort to reduce costs, employment cuts may have been too deep, and that at the first sign of an economic recovery, businesses will be scrambling to hire.

Lastly, when the economy does recover, having delayed retirement due to the stock market decline having decimated their 401-K’s, baby boomers should start leaving the workforce in large numbers, creating a labor shortage for experienced employees.

The global financial crisis and resultant economic slowdown is negatively impacting Robert Half. The operating margin is contracting with all reporting segments coming under pressure from reduced client demand. However, the stock’s low valuation discounts much of the negative implications of the current weak economic environment.

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. Our target for Robert Half stock is $23.50, which is based on a 0.85 P/S ratio on 12-month trailing net service revenues.