Cash In on Employment Growth
The American jobs machine is showing signs of life. These companies are bound to benefit.
The "jobless recovery," which critics of the U.S. economy have been carping about since the Great Recession ended in 2009, is now simply a recovery. The U.S. added more than 1.3 million positions in the first seven months of this year. That’s good news for companies that benefit from greater employment, as well as for people who have invested in them.
Stocks of firms that provide staffing and payroll services have been sizzling, with average returns of 42% over the past year. Some analysts suggest that more gains are likely as the economy continues its slow, steady expansion and as staffing and payroll companies boost revenue and profits.
One such outfit is Kelly Services (symbol KELYA). The Troy, Mich., company places temporary employees in a variety of fields, such as law, health care, computing and finance. Although recent job reports have been strong, S&P Capital IQ analyst Michael Jaffe sees employers “remaining cautious in their hiring practices” and using the kind of temporary workers Kelly specializes in. Jaffe says Kelly is his top pick in the staffing sector, and he rates the stock a “strong buy.”
Despite having returned 63% over the past year, Kelly shares still seem attractively valued. At $19.67, they sell for 13 times the average of analysts’ estimated earnings for 2013 (all prices and returns are as of August 6). Jaffe notes that the shares have often carried price-earnings ratios above 20 during past economic expansions.
The “King Kong of accounting staffing” is how analyst Andrew Steinerman, of JPMorgan Securities, describes Robert Half International (RHI). Steinerman says Half provides 20% of the temporary professionals in accounting and finance in the U.S. Half’s revenues and profits climb quickly during expansions, Steinerman says, and the Menlo Park, Cal., company “is positioned to again grow faster and have higher [profit] margins than almost all the other publicly traded staffers.” Half shares, at $38.38, have returned 41% over the past year and trade at 21 times estimated profits. With a yield of 1.7%, the stock is not a big income play, but Half has boosted its dividend every year since it began making cash distributions in 2004.
ManpowerGroup (MAN), a provider of recruiting and temporary staffing services, gets more than half of its revenue from Europe, so it’s not surprising that the company has recently been posting year-over-year quarterly revenue declines. However, cost-cutting enabled the Milwaukee-based firm to report a 71% jump in second-quarter earnings from the same period a year earlier, and investors responded by sending the shares to a two-year high. At $67.57, the stock has nearly doubled over the past year and trades at 17 times estimated 2013 earnings.
Analyst Jeffrey Silber, of BMO Capital Markets, who has a “buy” rating on the stock, says the cost-cutting campaign is helping to improve the company’s earnings prospects more quickly than he expected. He says Manpower, which derives 85% of its revenues outside the U.S., will boost profitability by promoting more-lucrative services, such as technology recruitment.
It pays to wait. Payroll processors will also get a boost from stronger job growth. For now, though, we’re not recommending either Automatic Data Processing (ADP) or Paychex (PAYX), because both stocks look a bit too expensive. ADP, at $72.24, trades at 23 times estimated earnings for the fiscal year that ends in June 2014. And Paychex, at $40.52, sells for 24 times forecasted profits for the year that ends in May 2014.
Both companies serve their customers by cutting checks to their clients’ employees, sending out annual W-2 forms and performing a number of other human-resources tasks, such as managing benefits. Both have strong balance sheets — ADP, in fact, is one of only four U.S. industrial companies with triple-A credit ratings. That makes it likely that both can continue to pay — and in the case of ADP, boost — their dividends. ADP has lifted its payout every year since 1976. Its stock yields 2.4%; Paychex yields 3.5%.