The U.S. labor market has been witnessing record low unemployment levels and strong job additions since the beginning of the year. While the economy continues to create new jobs despite the 18-year low jobless rate, a tight labor market is compelling companies to pay higher to attract and retain employees. Higher wage growth, a tightening labor market and a low unemployment rate indicate a bullish economy.
Trump administration’s business-friendly approach, including tax cuts and higher government spending act as major growth catalysts for the improvement of the overall economy, which in turn inspires optimism about growth of the staffing industry.
Per a report by statista, U.S. staffing industry has shown steady improvement over the past few years. From $119.4 billion revenues in 2013, the industry’s top line grew to $142.8 billion in 2017. For 2018, revenues are anticipated to be around $148.3 billion and are expected to exceed $150 billion in 2019.
Industry Outpaces Sector and S&P 500 Index
Looking at shareholder returns over the past year, it appears that the broader economic recovery is enhancing investors’ confidence in the industry.
The Zacks Staffing Industry, which is a group within the broader Zacks Business Services Sector, has outperformed its sector as well as the benchmark index in the past year.
While the stocks in this industry have collectively gained 43.8% in the past year, the Zacks S&P 500 Composite and Zacks Business Services Sector have rallied 18.2% and 23.9%, respectively.
One-Year Price Performance
Staffing Stocks Trading Cheap
Despite the outperformance of the industry over the past year, its valuation looks really cheap now. One might get a good sense of the industry’s relative valuation by looking at its EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) ratio, as the players have significantly high levels of debt.
The industry currently has a trailing 12-month EV/EBITDA ratio of 9.74, which compares favorably with 13.46 figure of the broader sector.
The space also looks inexpensive when compared with the market at large, as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.78.
Improving Economy Indicates Near- to Mid-Term Outperformance
An improving economy and Trump’s business friendly moves are benefiting manufacturing as well as non-manufacturing sectors, which, in turn, are aiding the staffing industry.
But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. The valuation discussion shows that market participants are willing to pay up for these stocks already, potentially limiting further upside from current levels.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance going forward is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019 while the light blue line represents the same for 2018.
Price and Consensus: Zacks Staffing Industry
This becomes clearer by focusing on the aggregate bottom-up EPS revision trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $2.91 EPS estimate for the industry for 2018 is not the actual bottom-up estimate for every company within the Zacks Staffing Industry but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the industry’s earnings per share for 2018 but how this estimate has evolved recently.
Current Fiscal Year EPS Estimate Revisions
As you can see here, the $2.91 EPS estimate for 2018 has been revised 11.9% upward since Aug 31, 2017. In other words, the sell-side analysts covering the companies in the Zacks Staffing Industry have been steadily decreasing their estimates.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.
The Zacks Staffing industry currently carries a Zacks Industry Rank #66, which places it at the top 26% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Our proprietary Heat Map shows that the industry’s rank has continually improved over the past four weeks.
Staffing Stocks Promise Long-Term Growth
While the near-term prospects look welcoming for investors, the long-term (3-5 years) EPS growth estimate for the Zacks Staffing industry also appears promising. The group’s mean estimate of long-term EPS growth rate is at the current level of 14.3%. This compares to 9.8% for the Zacks S&P 500 Composite.
Mean Estimate of Long-Term EPS Growth Rate
In fact, the basis of this long-terms EPS growth could be the recovery in the top line that the Zacks Staffing industry has been showing since the beginning of 2017.
Revenues: Zacks Staffing Industry
This is a great place to invest in right now, both with respect to the near term and the longer term.
The latest job numbers bode well for staffing companies. Strong non-farm payrolls data for July indicate that employers will continue to recruit more people, especially as the economy remains remarkably strong.
So, while the more cautious of us might wait for a better entry point, here are some stock picks for the rest. Below we present four promising stocks from the staffing industry, which have a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) and have witnessed upward earnings estimate revisions in the last 60 days.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Heidrick & Struggles International, Inc. (HSII - Free Report) : The stock of this Illinois-based provider of provider of executive search, culture shaping, and leadership consulting services has gained 79.4% year to date, outperforming the 16.1% rise of the industry it belongs to and 7.8% rise of the benchmark index. The Zacks Consensus Estimate for current year EPS improved 11% in the last 60 days. Currently, it has a Zacks Rank #1.
Price and Consensus: HSII
BG Staffing, Inc. (BGSF - Free Report) : The stock of this Texas-based provider of temporary staffing services has climbed 73.7% year to date. The Zacks Consensus Estimate for current year EPS improved 19.9% in the last 60 days. Currently, it has a Zacks Rank #2.
Price and Consensus: BGSF
Kforce, Inc. (KFRC - Free Report) : The stock of this Florida-based provider of professional staffing services has soared 67.5% year to date. The Zacks Consensus Estimate for current year EPS improved 2.3% in the last 60 days. Currently, it has a Zacks Rank #2.
Price and Consensus: KFRC
Robert Half International Inc. (RHI - Free Report) : The stock of this California-based staffing and risk consulting services has rallied 39.7% year to date. The Zacks Consensus Estimate for current year EPS improved 2.4% in the last 60 days. Currently, it has a Zacks Rank #2.
Price and Consensus: RHI
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