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Disappointing Near-Term Outlook for Staffing Industry

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The Zacks Staffing industry comprises companies that offer a wide range of services related to human resources and workforce solutions. These include employment screening, recruitment (both for temporary staffing and long-term placements), retirement solutions, human capital management, payroll management, performance management, organizational planning, financial and expense management.

Here are the industry’s three major themes:

  • Revenues and cash flow have grown steadily over the past few years, enabling most industry players to pay out stable dividends. Economic strength and stability, which drives manufacturing and non-manufacturing activities, are aiding the industry with additional hiring and wage increase. Notably, U.S. GDP grew at an annualized rate of 2.1% in fourth-quarter 2019, in line with growth in the third quarter, per estimates released by the Bureau of Economic Analysis.
  • Staffing firms are shifting toward employee-friendly, technology-based recruiting techniques like social media, mobile technology, artificial intelligence and big data. Also, technologies like cloud and blockchain offer more storage and safety to HR data. These trends should keep demand for staffing services in good shape.
  • Owing to record low unemployment and a tight labor market, employers are reluctant to lay off skilled employees. This has reduced the pool of experienced candidates. As a result, hiring of temporary and contractual workers is likely to increase throughout the year.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Staffing industry, which is housed within the broader Zacks Business Services sector, currently carries a Zacks Industry Rank #182. This rank places it in the bottom 29% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term growth prospects. 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.

The sell-side analysts covering the companies in this industry have been decreasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has decreased 5.8%.

Despite the bleak prospects, we present a few stocks that investors can retain in their portfolio. But before that, let’s take a look at the industry’s recent stock market performance and current valuation

Industry Underperforms Sector and S&P 500

The Zacks Staffing industry has underperformed the broader Zacks Business Services sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 6.7% over this period against 25.1% rally of the broader sector and 22.1% rise of the Zacks S&P 500 composite.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization), which is commonly used for valuing staffing stocks because of their high debt levels, the industry is currently trading at 6.75X compared with the S&P 500’s 11.95X and the sector’s 12.19X.

Over the past five years, the industry has traded as high as 9.73X, as low as 5.60X and at the median of 7.63X, as the charts below show.

EV-to-EBITDA

 

 

Bottom Line

A solid economy, which drives manufacturing and non-manufacturing activities, is aiding the staffing industry with additional hiring and wage increase. However, higher talent cost due to a competitive labor market and lack of skilled labor are concerns.

Below we have mentioned three stocks from the staffing industry, which we believe investors should retain in their portfolio as these carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s take a look at the stocks.

Robert Half International Inc. (RHI - Free Report) : This California-based firm provides staffing and risk consulting services in North America, South America, Europe, Asia, and Australia. The Zacks Consensus Estimate for current-year EPS has improved 1.1% in the past 60 days.

Price and Consensus: RHI

 

Korn Ferry (KFY - Free Report) : This California-based company provides talent management solutions worldwide. The Zacks Consensus Estimate for current-year EPS has improved 5.3% in the past 60 days.

Price and Consensus: KFY

 

ManpowerGroup Inc. (MAN - Free Report) : This Wisconsin-based company provides workforce solutions and services in the Americas, Southern Europe, Northern Europe, and the Asia Pacific Middle East region. The Zacks Consensus Estimate for current-year EPS has improved 0.6% in the past 60 days.

Price and Consensus: MAN

 

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