Recruiting and Staffing Company Valuations – June 30, 2021 Update
In the first six months of 2021, a boom in post-pandemic economic activity coincided with improvements in consumer confidence and hiring activity. RSM provides an excellent summary of recent economic trends and the outlook through the end of the year here. Although significant risks to the economy remain, market values associated with recruiting and staffing companies have generally increased past even pre-pandemic levels. This article will briefly examine the potential drivers of the recent improvement in valuations within publicly-traded recruiting and staffing companies.
This article updates our December 31, 2020 analysis.
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, 2021.
Figure 1 summarizes the recruit and staffing companies’ median market value of invested capital (“MVIC”), median revenues, and median earnings before interest, taxes, depreciation, and amortization (“EBITDA”). Latest fiscal year is abbreviated “LFY” (2020), while latest 12-month period is abbreviated “LTM” (latest available information as of June 30, 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. In the latest 12-month period, firms posted substantial increases in their MVIC despite stagnant revenue and EBITDA growth.
The indexed trend lines and medians in Figure 1 only tell half the story. In some cases, the publicly-traded recruiting and staffing companies saw decreases in MVIC despite maintaining or even increasing revenue or EBITDA in 2020. In other cases, some industry constituents experienced increases in MVIC despite declines in revenue and EBITDA. In our previous analysis of this industry, we identified that the operational focus of each company might have played a role in the mismatch between financial statement metrics and MVIC.
In the LTM, all but one of the companies analyzed experienced an increase in MVIC. As is illustrated in Figure 1, most companies experienced muted growth through the LTM period. However, there are certainly outliers. Companies that saw significant declines in EBITDA and MVIC in the LFY period bounced back in the LTM. For instance, GEE Group, Inc. posted a 56% increase in MVIC and a 96% increase in EBITDA.
Valuation Multiples
Figures 2 and 3 present the historical trend of revenue and EBITDA multiples for the industry.
With the recent increase in MVIC as of June 30, 2021 and flat revenue and EBITDA growth, valuation multiples ticked up in the latest period. 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 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 June 30, 2020 – some of the worst months of the COVID-19 pandemic. NFY projections for the industry at the time called for sharp declines in revenue and EBITDA. These declines are evident in the LFY period (2020) via the blue line.
Like expectations as of June 30, 2020, industry constituents expect to experience a recovery in revenue and EBITDA in 2021 and 2022. However, revenue and EBITDA projections reflect a return to pre-pandemic levels in 2021 and continue to grow in subsequent years.
We also looked to identify a meaningful correlation between growth and observed LTM revenue and EBITDA multiples. While we were not able to discern a meaningful trend between growth rates and LTM revenue multiples, we noticed a (loose) relationship between projected growth and LTM EBITDA multiples. Figure 6 presents this trend below.
The relationship between growth and EBITDA multiples is inconsistent at best. However, non-growth-related factors frequently impact valuation multiples. For instance, the highest multiple (over 26.0x) belongs to Robert Half International, Inc., which is the behemoth of the industry and expects significant EBITDA growth in the NFY.
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 possible correlation between size (measured by market capitalization) and LTM EBITDA multiples.
While there may be a tendency for smaller companies to trade at lower valuation multiples, there are certainly outliers. For example, TrueBlue, Inc. traded at a 24.7x LTM EBITDA multiple and had a market cap of less than $1 billion. This company, however, is projected to experience 169.1% EBITDA growth in 2021!
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. We still see data points that do not align with the general trends observed. In this case, Robert Half trades at a 2.0x LTM revenue multiple. However, Robert Half is one of the more prominent players in the industry and analysts expect the company to return to 11%+ EBITDA margins in 2021 and subsequent years. These factors suggest that investors are not valuing Robert Half based on its current profitability but rather by its anticipated growth rates and future profitability.
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 December 31, 2020 to June 30, 2021. However, significant uncertainties remain for the economy as a whole, which could threaten the growth expected in the public companies in the industry. As we observed, growth expectations play a significant role in how these companies are valued. If these expectations change, we could see volatility in their 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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