Recruiting and Staffing Company Valuations – June 2022
The Great Resignation that began in early 2021 and continues to plague many HR departments across the U.S. has been a boon to the recruiting and staffing industry through the end of 2021. The sector recorded record revenue and profit margins as demand from employers soared. However, as fears of economic recession grew in 2022, some employers began cutting back on their workforce targets. For example, Meta indicated a slowdown in hiring for 2022, and Novartis laid off 8,000 staff worldwide.
In this analysis, we observed that the publicly traded recruiting and staffing companies are generally expected to grow through the end of 2022. These expectations are consistent with other industry analyses, such as Staffing Hub’s 2022 State of Staffing Benchmarking Report, which indicated substantial growth expectations among operators through the end of 2022, despite the recent downturn in economic indicators and public market values.
However, despite the expectation of growth through the end of the year, valuations of the publicly-traded recruiting and staffing companies declined between 2021 and June 2022. This article will briefly examine how these and other factors appear to be impacting valuation as of June 30, 2022.
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. A few companies analyzed in our December 2021 update were removed from the group for this analysis. ShiftPixy started the process of restructuring its operational focus in 2022, and the stock price appeared abnormally volatile. Volt Information Sciences was acquired in April 2022 and was no longer publicly traded. Both of these companies were removed from the group analyzed. The effective date of this analysis is June 30, 2022.
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” (2021), while the latest 12-month period is abbreviated “LTM” (the latest available information as of June 30, 2022).
Figure 1 shows that the public recruiting and staffing firms generated impressive financial performance in 2021 and the LTM period. These improvements in financial performance make sense, given the substantial increase in demand for recruiters and staffing firms over the last few years. Despite continued revenue and EBITDA growth, valuations in the industry declined from December 2021 to June 2022.
Digging deeper into the data, all but two companies (Hudson Global and Kelly Services) experienced a decline in MVIC between December 2021 and June 2022. Seven of the 12 industry constituents analyzed posted valuation decreases of approximately 20% or more.
Valuation Multiples
Figures 2 and 3 present the industry’s historical trend of revenue and EBITDA multiples.
In Figures 2 and 3, we see that revenue and EBITDA multiples generally declined through June 2022. The median revenue as of June 30, 2022 was 0.57x, while the median EBITDA multiple was 7.6x. We will examine what may be impacting the valuation multiples next.
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 2022 for most companies).
In Figures 4 and 5, the orange line represents data as of June 30, 2021. NFY projections for the industry at the time called for sharp increases in revenue and EBITDA. Actual results in 2021 fell in line with these expectations as is seen in the blue line and increase in revenue and EBITDA from LFY-1 to LFY.
Looking forward from June 2022, substantial growth is expected for the NFY (2022) albeit at a somewhat decelerated rate as compared to prior year projections. This reduction in growth expectations could be signaling some additional risk to the industry and is a possible culprit to the recent declines in market values. Therefore, we looked to identify a meaningful correlation between growth and observed revenue and EBITDA multiples. These observations are summarized in Figures 6 and 7.
In our December 2021 update, we could not identify a meaningful relationship between growth rates and valuation multiples. However, as of June 30, 2022, growth expectations appear to have a measurable impact on the valuations of publicly traded staffing and recruiting firms.
See also: Need to prepare financial statement projections? See A Practical Guide to Financial Statement Forecasts for Business Valuations.
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 8 shows some possible correlation between size (measured by market capitalization) and LTM revenue multiples.
While there may be a general tendency for larger companies to trade at higher valuation multiples, the relationship is not consistent among the smaller companies. This may indicate that investors are considering many other 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 for the recruiting and staffing industry, as shown in Figure 9 below.
EBITDA margins appear to meaningfully impact the magnitude of revenue multiples.
The Leverage Story
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) are issued to equity holders. Greater levels of perceived financial risk to equity holders tend to reduce valuation multiples. In Figure 10, we plot LTM 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 eight of the 12 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, profitability, and leverage. A summary of these observations is presented below and compared to those made as of December 31, 2021.
Valuations in the recruiting and staffing industry rose precipitously in 2021 and have since corrected in June 2022. Deterioration in investor sentiment towards equity securities and an expected contraction in economic activity certainly have impacted the industry’s valuations. However, based on our analysis, one of the primary drivers of the industry’s declining valuations is likely its reduced growth expectations among most industry players.
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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