Recruiting and Staffing Company Valuations – June 2024
The recruiting industry has evolved rapidly over the last several years. The Great Resignation in 2021 was followed by the War for Talent, and then the tech layoffs of 2022 and 2023. A number of emerging issues within the recruiting and staffing industry have emerged in 2024.
The Bureau of Labor Statistics released its June 2024 employment report on July 5, 2024, which showed some improvements in the expected number of jobs. However, prior estimates for job additions in April and May were revised lower. The unemployment rate increased to 4.1% in June, up from 3.6% in June 2023. Overall, these trends suggest a slowing job market.
While there are uncertainties within the labor market, a global talent shortage exists among many companies, across many industries, and universally among companies of all sizes. A ManpowerGroup survey indicated that about 70% of companies in the U.S. and 75% of companies globally are reporting a talent shortage. While the healthcare and life sciences industries reported the highest labor shortages, consumer products, information technology, logistics, automotive, industrials, finance, energy, and a number of other industries reported significant labor shortages.
Interestingly, the values of publicly traded recruiting and staffing companies have declined as the perceived demand for their services has continued to increase. This article will briefly examine how recent and expected financial performance has impacted valuations in the industry.
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 June 30, 2024.
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” (2023), while the latest 12-month period is abbreviated “LTM” (the latest available information as of June 30, 2024).
Figure 1 shows that the public recruiting and staffing firms generated strong financial performance from 2021 to 2023. However, valuations have not necessarily moved congruently with financial performance, which also flattened in the latest 12-month period.
In prior analyses of this industry, we noted that the growth expectations associated with the public recruiting companies moderated. This likely resulted in a pullback in valuations. Through June 2024, valuations declined somewhat as financial performance stagnated.
Digging deeper into the data, eight of the 13 industry constituents experienced a decline in MVIC between December 2023 and June 2024. About half of these companies posted decreases of 10% or more.
Valuation Multiples
Figures 2 and 3 present the historical trend of revenue and EBITDA multiples for the industry.
In Figures 2 and 3, we see that revenue and EBITDA multiples declined sharply in December 2022 but increased through December 2023. While the median revenue multiple increased slightly from 0.58x as of December 2023 to 0.61x as of June 2024, EBITDA multiples remained at approximately 12.0x. 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 2024 for most companies).
In Figures 4 and 5, the orange line represents data as of June 2023. NFY projections for the industry at the time called for a decline in revenue and stability in EBITDA, before resuming growth in the NFY+1 period. Actual revenue growth in 2023 fell in line with expectations, while EBITDA levels declined significantly, as is seen in the blue line from LFY-1 to LFY.
As of June 2024, the public recruiting and staffing companies are expected to see a decline in revenue and a flat change in EBITDA for 2024, before increasing again in 2025. Given the uncertainty in labor conditions, the projection for the public industry constituents appears to make sense.
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 June 2023 update, growth did not appear to have a meaningful impact on the valuations of the publicly traded staffing and recruiting firms. As of June 2024, investors appear to be placing greater consideration on future growth prospects.
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 presents the public recruiting and staffing companies’ size (measured by market capitalization) and LTM revenue multiples.
Based on the data presented in Figure 8, the largest companies appeared to trade at the highest revenue multiples, while the smaller companies generally traded at lower multiples. However, we did not discern a meaningful relationship between valuation multiples and size among the companies with market capitalizations of less than $1.5 billion.
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 9 below.
Based on the data presented in Figure 9, EBITDA margins appear to have an impact on the magnitude of revenue multiples in the recruiting and staffing industry.
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 debt to total capital ratios (where available).
The debt to total capital ratio measures the magnitude of a company’s use of debt. The higher the ratio, the greater the company’s use of debt. In Figure 10, there appeared to be a correlation between debt usage and valuation multiples. Those companies with lower debt ratios tended to trade at higher valuation multiples.
Tying It All Together
The trends observed in this article suggest that valuations of publicly traded recruiting and staffing companies appear to be impacted to some degree by all of the factors examined. A summary of these observations is presented below and compared to those made as of June 30, 2023.
Current valuations appear to have re-focused on growth. Profitability and financial risk appear to remain important factors in determining the magnitude of the valuation multiples for publicly traded recruiting and staffing companies. As the recruiting and staffing environment continues to evolve rapidly, it will be interesting to see if growth again becomes a primary driver for how these companies are valued.
We hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.
