Recruiting and Staffing Firms: Valuations Reflect a Long Road to Recovery

In a recent and informative article by Joe Brusuelas, chief economist of RSM US LLP, hiring in the United States declined by 140,000 in December. Much has been said about the uneven impact of the coronavirus pandemic on the labor market, including the potential for millions of permanently lost jobs as businesses shutter their doors forever. The highest unemployment rates continue to be focused on retail, restaurant, entertainment, leisure, and hospitality sectors. Some industries, however, have seen improvement in recent months, such as industrial, logistics, and financial services.1 How have valuations of the firms that work to fill open positions in these industries changed due to changing labor market conditions? In this article, I will examine the recent historical and expected financial performance of these companies and the various factors that may be impacting their valuations.

Important notes: This article briefly investigates what may be driving valuations in the industry from a financial statement perspective. An actual valuation of a company requires an in-depth analysis of the business operations and associated risk factors that cannot always be directly considered through the data on the financial statements. Also, in order to keep the length manageable, this article will focus on the factors that are usually most influential in driving business valuations: growth, size, and profitability, and will not address 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. I focused on U.S. companies that were traded on major exchanges for at least a year with a stock price equivalent of $1 or more. The effective date of this analysis is December 31, 2020.

The industry’s median market value of invested capital (“MVIC”), median revenues, and median EBITDA are summarized in Figure 1 below. Latest fiscal year is abbreviated “LFY”, while latest 12-month period is abbreviated “LTM”.

Figure 1 shows us that values and financial performance among the public recruiting and staffing firms has been somewhat volatile. In 2020, these companies generally posted declines in both financial metrics and MVIC values. Certain companies that focus on filling highly-skilled and technical roles, such as ASGN and Kforce, were able to maintain or grow their revenue and EBITDA even through the pandemic. As a result, ASGN and Kforce saw increases in their MVIC values between December 31, 2019 and the same date in 2020.

Given the steeper decline in EBITDA across the broad industry when compared to MVIC values, a sharp increase in EBITDA multiples would be expected. A historical comparison of revenue and EBITDA multiples for the industry is presented in Figures 2 and 3 below.


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). Median NFY+2, or calendar 2022, growth is presented for revenue but not shown for EBITDA due to the lack of projected data for many of the comparable companies.

In this case, it makes sense to focus on growth after the NFY (calendar 2020) period. The industry is expected to generate strong revenue growth in 2021 and 2022, but not enough to completely recover from the downturn caused by pandemic. Additionally, the projected levels of revenue and EBITDA are well below expectations as of December 31, 2019, which is likely a key factor driving the overall decline in industry MVIC values as of the current date.

I also looked to identify a meaningful correlation between LTM revenue, EBITDA multiples, and projected growth rates. While there were not enough projected EBITDA figures to draw a meaningful conclusion from the data, I did observe some relationship between projected growth and LTM revenue multiples. This correlation is presented in Figure 6 below.

There appears to be some correlation between growth rates and revenue multiples (see trend line), although several inconsistencies are noted. The three data points within the circle (Heidrick & Struggles, Korn Ferry, and Robert Half) all have EBITDA margins of approximately 10%, which investors appeared to place more importance on than growth. The relationship between profitability and revenue multiples are shown below.

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. Therein, size can be used to measure a multitude of relevant risk factors. In this case, I did not observe a discernable relationship between size and LTM revenue or EBITDA multiples, which suggests that other factors (such as growth, profitability, or some other qualitative considerations) have a greater impact on how investors view this industry. While this is not to say that size is completely ignored, it appears to be overshadowed by other factors as of December 31, 2020.

The Profitability Story

Revenue multiples are typically heavily influenced by profitability, as higher levels of profitability indicate more return per dollar of revenue. Investors are usually willing to pay more per dollar of revenue and, thus, higher revenue multiples can be observed in companies with higher levels of profitability. This relationship between LTM revenue multiples and LTM EBITDA margins can be observed in Figure 7 below.

There appears to be some tendency here for companies with higher EBITDA margins to trade at higher revenue multiples. The relatively consistent trend observed in Figure 7 would suggest that this is a primary consideration in how companies in this industry are priced.

Tying it All Together

The trends observed above would tend to suggest that valuations of the publicly-traded staffing and recruiting firms are currently impacted primarily by growth and profitability, which are factors that typically have a strong influence on a company’s value. Select companies that focus on hiring highly-skilled and technical employees performed well in 2020 despite the pandemic, which was reflected in a rise in the market values and multiples for these companies. Other companies, such as Kelly Services, ManpowerGroup, and TrueBlue, which have much greater levels of exposure to light industrial, admin, and other less technical positions, are expected to post continued declines in revenue. These trends are generally consistent with what we are all seeing in the news about where the greatest levels of unemployment lie in the economy.

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This article was originally posted to LinkedIn on January 11, 2020.