Monday, December 13, 2010

Robert Half Set to Continue Gains?

Robert Half International RHI is an interesting stock to look at because its earnings and –more importantly- its share price drivers and prospects tend to reflect macro-economic concerns rather micro. It is a very cyclical stock. Analysts waste a lot of time trying to analyze the finer detail of Robert Half’s numbers and execution, but in reality it is the employment environment that governs its prospects.

Having noted that, it is worth noting that this doesn’t preclude individual company analysis of Robert Half. Rather, it means that an analysis should focus on the macro-economic direction (employment gains) and then appraise prospects based on the performance of their execution. For example, the following data is a good example of how cyclical this stock is.

The first column represents a metric to analyze the turning point in Robert Half fortunes. The quarterly revenue is divided by the rolling yearly revenue. The second column is the quarterly Gross Margin. The third is the private non-farm payroll net 3-month, taken from the Bureau of Labor Statistics.

The green number represent bottoms or troughs, whereby the direction afterwards is upwards. Similarly, the red numbers are tops or peaks.



Quarter Rev as percentage of Rolling Year Revenue
Quarter GM
Private Non-Farm Payrolls 3 Month Net
2000
0.00%
42.83%
649
q2
0.00%
43.13%
311
q3
0.00%
42.92%
440
q4
26.15%
43.11%
289
2001
25.82%
43.24%
-126
q2
23.44%
42.04%
-645
q3
21.71%
40.13%
-634
q4
20.82%
39.61%
-908
2002
21.28%
39.47%
-379
q2
23.34%
38.70%
-165
q3
25.03%
36.18%
-165
q4
25.12%
35.79%
-64
2003
24.78%
35.85%
-309
q2
25.16%
36.73%
-53
q3
25.88%
37.34%
188
q4
26.21%
37.21%
303
2004
27.59%
37.74%
489
q2
28.73%
39.71%
628
q3
29.03%
39.87%
294
q4
28.19%
40.21%
489
2005
26.80%
40.75%
471
q2
26.79%
41.18%
752
q3
27.03%
41.06%
545
q4
26.50%
41.47%
542
2006
26.87%
41.66%
869
q2
26.70%
42.57%
262
q3
26.76%
42.06%
336
q4
26.42%
42.55%
384
2007
26.33%
42.00%
478
q2
26.52%
42.88%
234
q3
26.29%
42.48%
-108
q4
26.26%
42.92%
185
2008
25.68%
41.68%
-155
q2
25.25%
42.19%
-644
q3
24.03%
41.65%
-1060
q4
21.51%
40.65%
-1948
2009
19.61%
35.67%
-2257
q2
20.14%
35.34%
-1435
q3
22.07%
36.70%
-698
q4
24.28%
37.77%
-270
2010
24.98%
36.51%
236
q2
25.90%
37.69%
353
q3
26.70%
37.82%
372


Source: Robert Half,Bureau of Labor Studies, Earnings View


The key is to note how closely correlated Robert Half's cyclical fortunes trough with a bottom in private non-farm payrolls. However, it is worth noting that Gross Margins continued to rise, right up til the employment market turned with the recession in 2008. In fact Robert Half's share price did well (although there was some stock specific weakness in mid 2006) right up until the start of 2007.

All of which indicates that there is probably more to run from Robert Half in terms of Gross Margins, share price and profits. However, it appears that Robert Half's share price is far more dictated by the direction of employment gains/losses than an underlying current profitably. If you think the economy will continue to improve in 2011 and payroll gains will remain positive than RHI has further to run.