Robert Half Weak Outlook?

Robert Half gave a mixed bag of results. I always believe in telling it like it is and, frankly, I think the stock will be down tomorrow. However, I don't things are as bad as the market might take them and any decline could create a decent buying opportunity. I've previously written about Robert Half here and focused on its correlation with strong employment gains in a recovery. The metrics cited in that post continue to improve.

However, in this post I want to talk about the specifics of these results.

Reported

• Q4 Revs of $851.6m vs. $831 estimates
• Q4 EPS of 17c vs. 16c estimates

Guidance

• Q1 2010 Revs of $850-900m vs. $836.2m estimates
• Q1 EPS of 13-18c vs. 18c estimates

Robert Half Q4 2009 Results

They beat handsomely on revs and income but I suspect the market isn't going to like the mid point of  Q1 guidance being below analyst estimates. Whichever way I look at it, I can't conclude otherwise. Margins look to be lower than analysts had forecast and, many of the questions on the conference call focused on the reasons for this.

Answering analysts questions on the subject of margins for Q1, the board mentioned the following

1. State unemployment tax rates are expected to increase at the same rate in 2011 as in 2010, so a 50-75bp reduction in sequential temp gross margins for Robert Half
2. Protiviti seasonality will result in a sequential 10% decline in revenues. This is at the midpoint of what they traditionally lose in this quarter.

Now given that, temporary and consultant staffing comprises 83.5% of operating income the forecast reduction in gross margin is significant. The Protiviti seasonality issue should be well known.


Conservative Guidance?

Robert Half estimates that State unemployment taxes will grow at the same rate as in 2010 (75bp hike) and ultimately your view on this guidance will depend upon your outlook for growth. Faster growth rates engender greater tax revenues and less need for tax hikes and they also bolster debt servicing abilities.

 I don't consider it apposite to 'second guess' Robert Half on this but merely point out the upside should the US continue on its accelerating growth path. They had this issue last year and it took them a while to recover, so perhaps they are being unduly conservative.

Moreover, looking at Robert Half guidance history for EPS (cents)...

 

	Q4 2009	Q1 2010	Q2 2010	Q3 2010	Q4 2010	Q1 2011
Market Estimate	5	6	7	13	16	18
Co Guidance	1 to 6	3 to 8	3 to 8	9 to 14	12 to 18	13 to 18
Actual	9	5	8	14	17
Actual/Co  %	160	40	100	100	83

....suggests that they tend to be conservative. In the last row, any number above 50% indicates that the actual result was above the midpoint of guidance. Nonetheless, the Q1 2011 guidance looks light.

It is a similar story with Revenues (m)


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	Q4 2009	Q1 2010	Q2 2010	Q3 2010	Q4 2010	Q1 2011
Co Guidance	675 to 725	725 to 775	730 to 780	770 to 820	800 to 850	850 to 900
Actual	737	737	769.1	817.3	851.6
Actual/Co %	124	24	78	95	103

Robert Half Q1 earnings may well hit the high end of their guidance, particularly as employment gains look highly probable for the US economy, but I think the time to pick up the stock will be around then. I expect analysts to downgrade forecasts after this outlook.



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F5 Networks Growth Looks Solid

F5 Networks gave earning results and it was promptly met by a 20%+ sell off. I suspect that this stock price fall is more to do with valuations than anything fundamentally wrong. This is not another Cree! Firstly, I want look at the headline numbers.

In Q1 to December 31, F5 Networks reported revenues of $268.9m and non-GAAP EPS of 88cents per diluted share. This was against consensus forecasts of $270.6m and 83cents.

For Q2 they guided towards revenues of $275-280m and non-GAAP EPS of 84-86cents. The market had estimates $281.1m and 85cents.  

Moreover, the mid point of their revenue guidance ($277m) represents a 34.6% rise on Q2 2009.So a 20% sell off, because they are guiding for revenues to be light by $3.6m?  

F5 Networks Was Ripe for a Sell Off?

I think what we are seeing here is a reaction to the sharp move upwards we have seen in the stock. When stocks are priced to perfection, any slight sign of weakness will seem them punished. I’ve held this before and, got out a lot before it had a $140 handle. As to the conference call, the Co mentioned a bit of weakness in late October but then, claimed that it had normalised in Nov-Dec.


Frankly, I'm not surprised that the guidance didn't trump estimates. Analysts are forever stuck in a game of 'join the dots' which always leads them to over shoot at a cyclical peak. They follow the stock price, adjust estimates accordingly, then move it downwards when the price falls. Analyst are eternally trying to make a name for themselves by appearing bullish about a stock doing well. The key to investing is to price stocks out yourself and to do it based on fundamentals, not on how an analyst can best fit his estimates to the current stock price.




F5 Networks Evaluation


Now to the fundamentals, considering that 2010 was a year of economic recovery (albeit tepid) we can expect some slowing of the rate of growth in the economy in 2011. However, this does not necessarily translate across all industries. In the case of network application technology, I don't think we will see much correction.


Indeed, F5 are guiding towards a 36.4% growth in revenues for the next quarter vs. Q2 last year. Similarly, they have just generated $97.6m in free cash flow for the quarter. For the trailing year, free cash flow it is $328.6m. This is not the 'dot com' bubble. These companies are generating real earnings and cash flows and, based on 'old economy' metrics their prospects look good.


A quick look at revenues and gross margins...

	Dec 31 2009	Mar 31 2010	Jun 30 2010	Sep 30 2010	Dec 31 2010	Mar 31 2011E
Revenue (m)	191.1	206.1	230.5	254.3	268.9	275-280
Sequential Growth %		7.8	11.8	10.3	5.7	2.3-4.1
Gross Margin %	79.5	79.9	80.7	81.6	81.8	82

 ...demonstrates the slowing sequential revenue growth. Note that the midpoint guidance of 3.2% sequential for next quarter equates to 13.4% annually.


I tend to be conservative with these issues and for this type of situation I would want to buy it on a current FCF/EV of around 3.5% with a view to upgrading when/if they confirm a stabilising in sequential growth rate.  This would give a current price of $110. Well worth monitoring.