Recruiting and Staffing Company Valuations – December 2021 Update
The Great Resignation that began in early 2021 (and continues to plague the HR departments of companies across the U.S.) was a boon to the recruiting and staffing industry. With many individuals, particularly in the 30 to 45 years old age group, moving to new companies or pivoting their careers, demand for recruiting and staffing services increased significantly. These trends drove a substantial increase in valuations among the publicly traded recruiting and staffing firms. This article will briefly examine some of the factors that seem to have driven the improvements in valuations.
Important notes: This article examines potential driving factors for recruiting and staffing company valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are not always evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what the author interpreted as the primary value drivers. It will not touch on every observation in the data. For a quick read on the basic concepts of risk and return and how they apply in the context of this article, please visit: What is Value? and Risk and Return in the Market Approach.
The industry constituents for this analysis are listed below. The effective date of this analysis is December 27, 2021.
Figure 1 summarizes three items for the publicly-traded recruiting and staffing companies:
- Market value of invested capital (“MVIC”) calculated as the sum of market capitalization and interest-bearing debt;
- Median revenues; and
- Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
The latest fiscal year is abbreviated “LFY” (2020), while latest 12-month period is abbreviated “LTM” (latest available information as of December 27, 2021).
Figure 1 shows us that values and financial performance among the public recruiting and staffing firms have been somewhat volatile over the last five fiscal years. In the LFY, these companies broadly experienced declines in MVIC, revenue, and EBITDA due to the pandemic. However, in the LTM period, firms posted substantial increases in their reported revenue and EBITDA, which coincided with a significant improvement in overall valuations.
The indexed trend lines and medians in Figure 1 only tell half the story. MVICs of all but two companies increased between December 31, 2020 and December 27, 2021. Seven of the 14 industry constituents analyzed posted valuation gains of approximately 50% or more. However, a definitive link between historical growth and valuations could not be observed from the historical data. In some cases, valuations increased substantially in the latest period for companies that posted weak LTM growth. More on this later.
Valuation Multiples
Figures 2 and 3 present the historical trend of revenue and EBITDA multiples for the industry.
In Figure 2, we see that revenue multiples generally increased through the end of 2021 due to market values improvements generally outpacing revenue growth. However, in Figure 3, EBITDA multiples decline in the latest period, which reflect EBITDA growth exceeding improvements in valuations.
The Growth Story
Growth often has a strong influence on how multiples differ among companies in an industry. A summary of the consensus forecasts for each group is presented in Figures 4 and 5 below (note that “NFY” means next fiscal year and NFY = calendar 2020 for most companies). It is also important to note that five of the 14 companies examined did not have analyst projections for EBITDA.
In Figures 4 and 5, the orange line represents data as of December 31, 2020. NFY projections for the industry at the time called for sharp declines in revenue and EBITDA for 2020. These declines were ultimately accurate as is evident in the blue line. Revenue and EBITDA declined in the LFY period (2020).
However, the recovery in revenue and EBITDA in 2021 exceeded that which was projected a year ago. Both revenue and EBITDA are expected to continue to grow considerably through 2022.
We also looked to identify a meaningful correlation between growth and observed LTM revenue and EBITDA multiples. However, we were not able to discern a meaningful trend between growth rates and valuation multiples. Figure 6 presents the LTM EBITDA multiples relative to their associated projected growth rates.
The seemingly random distribution of multiples relative to their associated projected growth rates would suggest that growth does not have a singular impact on the valuation multiples for the industry.
The Size Story
Larger companies are generally perceived to have lower levels of risk relative to smaller companies due to improved product or geographic diversification, deeper management teams, access to a variety of distribution channels, and better availability of capital, among other factors.
Figure 7 shows a (very) loose correlation between size (measured by market capitalization) and NFY EBITDA multiples.
While there may be a general tendency for smaller companies to trade at lower valuation multiples, it is not specifically discernable in this industry. This may indicate that investors are considering a multitude of factors in valuing the publicly-traded recruiting and staffing companies.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. This relationship appears to hold true for the recruiting and staffing industry, as shown in Figure 8 below.
EBITDA margins clearly impact revenue multiples in the recruiting and staffing industry.
The Leverage Story (***New***)
New to this update, we consider the impact of financial leverage (or the companies’ use of debt) and their impact on the valuation multiples. In the last year, we have noticed an increasing trend of risk mitigation among investors, both in the private and public markets. Therefore, we have included financial leverage among the considerations we analyze to explain the observed valuation multiples.
Debt usage tends to increase financial risk to equity holders. Debt holders have a senior position within a company’s capital structure, and debt servicing occurs before any cash flow benefits (i.e., dividends) issued to equity holders. Greater levels of perceived financial risk to equity holders tend to reduce valuation multiples. In Figure 9, we plot NFY EBITDA multiples against their associated LTM interest coverage ratios (where available).
The interest coverage ratio measures a company’s ability to pay its interest obligations. The higher the ratio, the greater the company’s ability to cover its interest expense with its operating income. In Figure 9, companies with the highest interest coverage ratios appeared to trade at higher EBITDA multiples. However, we note that only half of the companies analyzed in this article had debt and meaningful interest coverage ratios.
Tying It All Together
The trends observed in this article suggest that valuations of publicly-traded recruiting and staffing companies appear to be impacted by growth, size, and profitability. However, investors are clearly considering all three of these factors (and likely others) when valuing companies in this space. A summary of these observations is presented below and compared to those made as of December 31, 2020.
Valuations in the recruiting and staffing industry have risen precipitously from the end of 2020 to the end of 2021. Most of the publicly-traded players are expected to continue to generate significant growth though factors, such as size, profitability, and financial risk have more apparent impacts on valuation multiples as of December 27, 2021. Other more qualitative factors are likely influencing multiples, including each company’s focus on staffing, permanent placement, executive recruitment, or consulting services.
Perhaps the most interesting observation between 2020 and 2021 is the significant difference in growth estimates at the end of each year. Headlines in 2020 were centered around record high unemployment rates, while 2021 was focused on labor shortages across many industries. The projected growth rates for these companies reflect these issues. However, where we identified a link between projected growth and valuation multiples at the end of 2020, such a relationship could not be readily identified at the end of 2021. These trends show the speed at which expectations can change as market conditions evolve and are a perfect example of the need for proper interpretation of capital market data when thinking through valuations.
I hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.
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