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Employment staffing companies like Robert Half International Inc. (RHI, Financial) are typically subject to high levels of cyclicality and economic cycles. The company appears to be at the bottom of its latest cycle with the stock selling at 52-week lows having declined from its 2021 highs.
Founded in 1948, Robert Half provides temporary, permanent and project-based staffing to companies seeking employees in the fields of finance, accounting and technology. It is one of the largest global staffing companies operating around the world. Its Protiviti subsidiary provides risk and business consulting and internal audit services to corporations through scores of global offices. Other brands include Accountemps and OfficeTeam.
The company generated over $6 billion in revenue last year, net income of approximately $598 million and currently has a market capitalization of $8.6 billion.
Business mix
Based on first-quarter 2022 revenue, the U.S. accounts for 78% of sales, with 22% coming from international markets. Europe is the largest international market at this time. Approximately 64% of the business is temporary staffing, which the company calls Contract Talent Solutions, and 10% is permanent placement solutions. The remaining is a segment called Protiviti, which is a business consulting firm which deals in areas such as internal audit, technology consulting, risk, compliance and business performance improvement.
Financial review
A staffing company would, of course, be hurt by an environment where workers are forced to stay home and businesses are shut down, and Robert Half was no exception. After a severe drop in revenue in 2020, the company rebounded nicely with a 26% increase in revenue and a 100% increase in earnings per share. The question is how revenue will respond in the next recession as so many are forecasting.
As of the first quarter, those fears had not yet been realized. The company reported a strong quarter as a result of a robust demand environment worldwide. Revenue increased 30% and net income grew 52% compared to the prior-year period. Permanent placement solutions led the way with 67% growth, followed by staffing solutions at 30% growth and Protiviti at 19% growth.
The business is not capital intensive, so the company typically generates significant free cash flow. Even in a tough 2020 with declining revenue, free cash flow was approximately $563 million. This has allowed the company to maintain a pristine balance sheet with no debt and over $550 million in cash as of the end of the first quarter.
The company returns almost all of its free cash flow to shareholders in terms of share repurchases or dividend repayments. The company has repurchased shares totaling $277 million, $159 million and $287 million for the fiscal years 2019, 2020 and 2021. Dividend payments have also been strong over the past three years, totaling $145 million, $156 million and $171 million.
Valuation
Consensus analyst estimates for Robert Half are $6.29 in 2022 and $6.60 for the following year. The question is when will earnings decline in the next recession, and by how much? Bank of America Securities has earnings declining to $5.36 in 2023 to $5.09 in 2024. That would produce an increasing price-earnings ratio from 12.6 times this year to 15 times next year and 15.7 times in 2024.
Using the Gurufocus discounted cash flow calculator with 5% long-term average earnings growth, the company appears to be undervalued. However, DCF calculations typically do not take into account a highly cyclical company’s earnings volatility.
The company currently pays a $1.72 annualized dividend per share, which equates to 2.20% dividend yield at this time. Based on estimated earnings for this year, the payout ratio is below average and the company has ample free cash flow to cover the dividend and still repurchase shares.
Summary
Robert Half should continue to grow throughout this year and produce solid cash flow that can be returned to shareholders. Although its possible earnings will decline in subsequent years in difficult economic conditions, the company should remain solidly profitable. The company’s debt-free balance sheet should provide major stability if we enter a recessionary environment.
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