Investing

Temp-Agency Stocks: Should Investors Apply?


Last month's decline in the U.S. unemployment rate was tiny, but it still raised investors' hopes that the worst may be over for temporary staffing companies.

Temp firms have been burned by a recession notable for massive cost-cutting and millions of layoffs. Manpower (MAN), for example, saw last quarter's revenues fall 36%, while Robert Half International (RHI) saw revenues drop 39%.

However, as investors learned on Aug. 7, the U.S. unemployment fell from 9.5% in June to 9.4% in July, a sign of hope for the worst labor market in a generation.

"Labor markets are not going to be booming for some time, unfortunately," says Standard & Poor's equity analyst Michael W. Jaffe. But, lately, "stabilization" is a word often heard from those in the temp industry, he says.

Further Job Losses"The worst appears to be over," BMO Capital Markets analyst Jeffrey Silber wrote on Aug. 7 in response to the labor market report.

Despite the small improvement in the jobless rate, July was the 19th consecutive month of job losses, with 247,000 jobs cut. But there were other encouraging signs in the labor market report, Silber noted.

Temporary jobs were down 26% year-over-year, a slight improvement from June's 26.6% decline. Also, the average weekly hours worked by full-time employees increased, from 33 to 33.1 hours. "This metric needs to rebound before a meaningful increase is seen in temporary staffing volumes," Silber wrote.

A true recovery would be great news for shareholders of companies that specialize in providing temporary workers. "Some of the best times for these companies are during the early stages of an economic recovery," says Robert W. Baird analyst Mark Marcon.

When a recovery is still in its early, tentative stages, companies are often hesitant to hire permanent workers, so they rely on temps, Marcon says. Also, because of the high unemployment rate, the pool of available temporary workers is large, and the quality of those workers is high.

Uptick in TempsFinally, Marcon notes, many staffing companies cut their own costs deeply, so any recovery in revenue is likely to be very profitable.

But, assuming an economic recovery is coming, will it be followed by enough job growth to buoy the industry, which includes firms like Manpower, Robert Half, TrueBlue (TBI), and Kelly Services (KELYA)?

Deutsche Bank (DB) analyst Paul Ginocchio says the industry's revenues could begin growing again much faster than Wall Street now expects. "We believe U.S. temporary staffing has bottomed in 2009, with [year-over-year] growth likely resuming" in the first or second quarter of 2010, he wrote Aug. 10.

Baird's Marcon says there is evidence that light industry lately has hired more temporary manufacturing workers—a typical sign of an upturn. However, he says, "the only question now is: What is the pace of recovery, and how long does the recovery last?"

Low-Level StabilizationWhile the economy appears to be stabilizing, it is doing so at a very low level. Manufacturers may be busier, but they're replenishing depleted inventories—not necessarily responding to an uptick in consumer spending. A "double dip" for the economy and for labor markets is possible, Marcon warns.

Many staffing firms are international businesses. At Manpower, for example, the Americas represent only 16% of revenues, while 29% of sales come from France.

Though European labor markets also show signs of stabilizing, analysts warn the pace of recovery may lag from region to region.

In the two trading sessions after the release of July's better-than-expected labor figures, shares of Manpower, Robert Half, Kelly Services, and TrueBlue were all up more than 4%.

Also rallying were other stocks directly exposed to the labor market. Monster Worldwide (MWW) is, along with temp staffing firms, classified in the "human resources and employment services" industry, though its specialty is online job listings. Shares of Monster were up 12.2% after July's jobs report.

With the path to recovery still hard to track, shares of staffing firms may not be a sure bet. But, if shares can be bought on pullbacks at the right price, they could be a good way to profit from a long-term rebound in the world's job markets.
Steverman is a reporter for Bloomberg News in New York.

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