robert-half-vs.-pagegroup-in-a-battle-of-asset-light-recruiting-companies

Robert Half Vs. PageGroup In A Battle Of Asset-Light Recruiting Companies

Return on invested capital (ROIC) is often the most important driver of value. For a company to achieve superior levels of ROIC, it must either have attractive profit margins or high levels of capital efficiency (preferably a combination of the two). Companies with high levels of capital efficiency are often referred to as asset-light businesses, and they have come to dominate much of our economy. The low capital intensity of their business models makes it comparatively easy to achieve stellar levels of ROIC and help drive value for investors. It’s easy to agree with Warren Buffett when he says, “…the best kind of earnings are the ones that go up without more capital investment.”

We analyze Robert Half (RHI) and PageGroup (PAGE) (OTCPK:MPGPF), two contenders in the asset-light recruitment industry that value investors may very well want to consider for their portfolios. For both companies, we walk through the key value drivers of return on invested capital and growth, as well as their balance sheets, dividend profiles and important strategic attributes.

What happened to capital intensity?

Not long ago, leading companies needed ample amounts of capital to rise to the top of their industries. Utilities, railroads and oil production simply couldn’t exist without huge investment. Go back about fifty years and capital intensive behemoths like Exxon Mobil (XOM) and General Motors (GM) dominated the landscape. Today, the largest US companies include Apple (AAPL), Alphabet/Google (GOOG) (GOOGL), Microsoft (MSFT), Amazon (AMZN) and Facebook (FB), all of which require relatively little capital investment in fixed assets. Rockefeller and J.P. Morgan must be turning over in their graves. The shift to an asset-light economy has not escaped the attention of famous investors such as Warren Buffett, and his recent CNBC Interview includes a few related nuggets that ROIC-hungry investors won’t want to miss.

Companies that can carve out strong competitive positions in asset-light industries or industry niches have a good chance of satisfying investors looking for strong double-digit levels of ROIC. Many also have significant growth potential, and thanks to their low capital intensity, plenty of cash to both grow and return substantial amounts to shareholders. We don’t have to look to the IT industry for asset-light businesses either, as proven by our two value-creative competitors in this piece, Robert Half and PageGroup, both of which are classified as industrial companies.

Let the battle begin, Robert Half versus PageGroup – Let’s start with ROIC

Let’s start with the most critical metric of them all, return on invested capital. We generally look for a return on invested capital of 15% or more nearly every year over the prior decade, but can go down closer to 10% depending on the consistency and sustainability of the metric, as well as overall portfolio considerations. Let’s have a quick look at how Robert Half and PageGroup stack up.

Robert Half and PageGroup ROIC profiles.

Source: Thomson Reuters Eikon

It’s clear from the above graphic that both companies are highly value-creative companies investors should likely have on their watch-list. However, as 2009 demonstrates, both companies are also quite cyclical and do suffer on both the top and bottom lines when there is a downturn. But investors can take comfort knowing that both remained far from loss-making even through the extreme financial crisis a decade ago.

We give the edge to PageGroup for two reasons. PageGroup demonstrates a superior ability to hold profitability up through a downturn and also to more rapidly return ROIC to highly value-creative levels after difficult periods. The average level of ROIC for the UK based company is also a touch higher.

Let’s move on to growth, value driver number two

Growth is also critical for value creation, especially for such high-ROIC companies. The global recruitment industry is still highly fragmented, leaving plenty of expansion potential for industry consolidators/leaders. In a number of geographic regions, such as Latin America or Greater China, the potential markets are very large but relatively immature providing substantial growth potential. Growth is also supported by the continued trend of recruitment outsourcing as more and more medium and large sized organizations are outsourcing their recruitment process from entry level jobs to high level jobs. Let’s have a look at how our two candidates have been taking advantage of the attractive growth backdrop.

Robert Half and Page group are growing revenue and EPS fast.

Source: Thomson Reuters Eikon

As we can see from the graphic, both companies display irregular but enticing growth profiles. We again see how cyclical the industry can be when we look at 2009, but long-term earnings per share (EPS) growth has been impressive. Combined with their ROIC profiles, both companies offer huge potential for value creation. PageGroup once more gets our vote as it is growing faster and from a smaller base with material access to high-growth geographies.

No analysis is complete without a look at the balance sheet

When analyzing ROIC, it’s important to remember that the spread over cost of capital is what really matters. For such high-ROIC companies, we don’t have to look too close as it is clear that they are creating value, but an optimal capital structure is still important, as is a financial cushion for such cyclical companies. PageGroup has long operated with essentially no debt and a large net cash position. Clearly that leaves the company more than prepared to deal with the cyclical swings inherent in the industry. It also means they can strategically invest during tough times and continue to pick up market share coming out of downturns. Pristine is likely the appropriate description.

Robert Half is much the same. Virtually no debt and a solid chunk of cash on the balance sheet. Some investors may argue that both companies should lever-up to optimize the cost of capital, but we prefer to see a healthy cash cushion in such a cyclical industry and enjoy the flexibility and potential that it represents.

It’s tough to pick a winner when looking at the stellar financial positions of the two companies, so let’s just call this category a tie.

Dividend investors might be excited about both companies

Many investors are in it for the dividends, so let’s have a quick look at the companies’ dividend profiles. Cyclical industries might not be the easiest places to find attractive dividend profiles, but the strong balance sheets and asset-light nature of these companies should give dividend investors comfort. As should the historical dividend performances of the two.

Robert Half has a low dividend yield of around 1.8% currently, which might keep many dividend investors away. But the dividend is growing at about a 10% annual clip and with so much cash and a payout ratio around 28%, it’s quite safe. They even increased it through the financial crisis in 2008/2009. So perhaps dividend investors should have a second look.

Robert Half dividend history impressive

Source: J.P. Morgan Ultimate Services Investor Conference Presentation, November 2018

PageGroup is a bit different. The company has a policy to offer an attractive and growing underlying dividend, but then combines it with frequent and often massive special dividends. Let’s have a look at a slide from the company’s March 6th results presentation to see just how impressive the dividend metrics can be.

PageGroup dividend profile impressive with huge special dividends.

Source: Company preliminary results presentation 2018

We see that the special dividend essentially doubles the normal dividend in many years. The resulting dividend yield is huge. And with a large net cash position and quickly growing earnings, we see no reason why the special dividends can’t continue. But investors might have to settle for just the ordinary dividend in tougher times. And historically, the company often did share buybacks rather than a special dividend. So it’s a bit tricky, but for dividend investors willing to accept some volatility in the special dividends, PageGroup sure looks attractive from a shareholder return perspective.

Dividend investors will have to decide which company wins this category based on their own preferences, but we give the edge to PageGroup.

Key strategic and management aspects might make the difference

We’ve walked through ROIC, growth, financial position and the dividend profile. Now let’s have a look at strategic positioning which no good investment case should be without. As mentioned, the industry is ultimately cyclical. It can also be very localized, whether by geography or discipline, and differ between temporary and permanent placements in the same market. Considering the industry backdrop, strategies to diversify across geographies and industries can help smooth the impact of economic cycles, and it is critical that companies have a strategy to navigate the ups and downs with enough operational and financial flexibility to adjust the cost base and simultaneously support the business or even grow the business in a down cycle.

We know both companies have the financial flexibility necessary, but we prefer the geographic and industry diversification of PageGroup, including a meaningful exposure to higher-growth emerging markets in both Asia and Latin America (Robert Half is primarily North America with a small European presence).

More importantly perhaps, we appreciate PageGroup’s focus on the long-term, backed by a systematic strategy to identify and categorize markets. Once individual markets are understood, the company knows where and how to adjust costs and investments in different business environments, even through downturns, with the ultimate goal of long-term strategic success rather than just meeting illusory quarterly expectations. The company’s long-term thinking is in-line with our own investment philosophy.

It’s difficult to build strong and lasting barriers to entry in the recruitment business. Brand, scale and expertise are the three main areas that companies can utilize to build economic moats, but even the best companies will generally only achieve a narrow moat. PageGroup is doing well to combine all three of these items to establish the strongest barriers of entry that can be expected in the industry. The group’s brands resonate strongly in the marketplace and the company has even been recognized as a leader in using emerging online platforms which strengthens the brands in the current industry backdrop. But you don’t need to take our word for it when it comes to the quality of PageGroup’s offering, just look at this incredibly long list of awards the company has received. Perhaps we have not given Robert Half enough attention in this category, but that may reflect how impressed we are with PageGroup rather than any failing on Robert Half’s part.

A quick and interesting check on valuation

Without going into detailed modeling, let’s have a high-level look at valuation for our two candidates.

Company Name

FCF Yield (FY1)

EV/EBITDA (FY1)

P/E (FY1)

PageGroup

10.8%

7.8

12.4

Robert Half

7.0%

10.8

16.2

Source: Thomson Reuters Eikon

Investors can now buy PageGroup with a free cash flow yield near 11%, an EV/EBITDA below 8x and a PE below 13x. That is rather attractive considering the strong ROIC levels and double-digit earnings growth. We also note that PageGroup looks a bit cheaper than Robert Half using this basic analysis.

The main risk regarding valuation and investment is likely the cyclicality of the businesses combined with the current stage of the business cycle. The stock prices of these companies have collapsed in previous downturns and can certainly do so again. We suggest some caution on position sizing, depending on overall portfolio characteristics of course.

We have focused this piece on Robert Half and PageGroup, but we do suggest that investors also consider peer Hays (OTCPK:HAYPY) as well.

PageGroup is the winner, but everybody gets a medal

Asset-light businesses stand a good chance of producing double-digit levels of ROIC, allowing them to self-fund growth and return substantial amounts to shareholders through dividends or buybacks. PageGroup and Robert Half in the global recruitment industry are two good examples that value investors should put on their watch-list. We do acknowledge that the companies operate in a highly cyclical industry with limited barriers to entry, which we suggest investors reflect in position sizing. But the quality and growth offered by these companies represents rare and reliable value creation over time.

PageGroup in particular offers stellar ROIC and growth with a long-term focus that it has deployed consistently for decades. Combine all of that with a pristine balance sheet and an attractive valuation, and PageGroup looks like a winner from our perspective.

Disclosure: I am/we are long MPGPF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed to or by the author. This article does not constitute investment advice.