Business at executive-recruitment companies is improving, buoyed by increasing confidence among corporate leaders and a stabilization in hiring for senior positions in the financial-services industry.
Heidrick & Struggles International Inc. (HSII:US) and Russell Reynolds Associates say they see some increase in demand, a trend that was echoed in a recent survey of consultants by William Blair & Co., an independent investment firm. Meanwhile, sentiment among chief executive officers strengthened in April to the highest level in almost two years, as the Chief Executive magazine confidence index rose to 6.07 from 5.55 the prior month, based on an e-mail survey conducted by the magazine.
Rising CEO confidence is a “key indicator” that’s helping to boost demand in the executive-recruitment industry, said Timothy Ghriskey, chief investment officer at Solaris Asset Management in New York, which manages more than $1.5 billion. “In the mid-to-later stages of an economic expansion, competition for business leadership intensifies, prompting more companies to employ search firms to attract talent.”
Gross domestic product expanded at a 2.5 percent annualized rate in the three months ended March 31, following a 0.4 percent gain in the fourth quarter, according to the Commerce Department. Growth was slower than the 3 percent median estimate of economists surveyed by Bloomberg.
The first quarter brought “signs of improvement” for Heidrick & Struggles, a Chicago-based executive-search company. This included 25 percent year-over-year revenue growth at its New York office, which is “a good indication that the financial-services sector may be stabilizing,” Chief Executive Officer Kevin Kelly said on a May 9 conference call.
Financial services is still a “substantial end-market” for the two largest publicly traded recruiters -- Heidrick & Struggles and Korn/Ferry International (KFY:US), said Tobey Sommer, an analyst in Atlanta at SunTrust Robinson Humphrey. Its share of each companies’ revenue has fallen in the past three years to about 22 percent for Heidrick & Struggles and 16 percent for Los Angeles-based Korn/Ferry, down from 32 percent and 19 percent in early 2010, he said.
While banks have been cutting staff, they’re also pursuing new areas of business and hiring senior-level executives to lead these divisions, Ghriskey said. The six largest U.S. banks announced plans in the first quarter to eliminate about 21,000 jobs, with the most vulnerable positions in units such as mortgage foreclosures, according to data compiled by Bloomberg.
The 2012 presidential election and this year’s budget debates made many corporate boards hesitant to change senior management, Sommer said. While recruitment “noticeably stalled” for more than a year, it now is rebounding as some of the uncertainty has dissipated.
Another “meaningful signpost” for the industry is turnover among CEOs, which rose 20 percent in April from a year earlier, Sommer said, citing data from Liberum Research in New York. Last month’s increase was the first positive change since December, according to Liberum.
Fifty-six percent of executive-search consultants in an April survey by William Blair described “a sequential improvement in demand” during the previous three months, with consultants specializing in financial services reporting a slow recovery, according to Timothy McHugh, an analyst in Chicago at the company.
Russell Reynolds Associates, a closely held global executive search and assessment company based in New York, is seeing “a big increase” in its work-in-progress pipeline, according to Symon Elliott, who leads the company’s U.S. operations in New York. That has translated into “fairly significant” growth in the number of client inquiries and new searches after these were “bumping along a bottom.”
“The U.S. environment’s not rosy by any means, but it’s getting better,” Elliott said.
For investors with a sanguine outlook for the U.S. economy, now may be a good time to invest in recruitment companies, because their stocks tend “to do well in the mid-to-later stages of an economic expansion,” Ghriskey said.
Their shares are starting to stabilize as a sell-off during the past two years appears to have stopped, said Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. and also a chartered market technician.
Heidrick & Struggles stock has outpaced the Russell 2000 Index by almost 18 percentage points since May 2, though it has lagged behind by 19 percentage points since Feb. 25, the day before the company reported fourth-quarter earnings and sales that missed consensus analyst estimates.
“Investors haven’t forgiven the company for its earnings miss in February,” though investment flows are taking “a step in the right direction” more recently, Stellakis said.
Recruiters have changed during the past five years to be less reliant on “big-ticket” executive placement by moving into nonsearch businesses, including training and career-development services, according to Matthew Beesley, head of equities at Henderson Global Investors in London, which oversees about $100 billion.
While this helped the companies weather the 18-month recession, their earnings growth could be more muted now than in the past because their diversification provides “less earnings oomph,” he said.
In addition, revenue from outside the U.S. now accounts for more than 20 percent of total sales, while financial services makes up less than before, so “investors could find that these stocks don’t behave the way they think they should during this economic cycle,” Beesley said.
Still, shares of these companies have “significantly underperformed” the Russell index during the past two years, so it won’t take much growth in the operating environment to attract investment, Sommer said. As a result, they could rally a lot “since they’re very under-owned,” Ghriskey said.
Another encouraging sign for these stocks comes from the relative performance of the financial-services index. The Financial Select Sector SPDR Fund (XLF:US) has led the SPDR Standard & Poor’s 500 Exchange-Traded Fund (SPY:US) by 9.4 percentage points since Nov. 30, reflecting more optimism among investors about the banking industry that’s starting to accrue to executive-search companies, Ghriskey said.
Along with their increased confidence, clients of Russell Reynolds Associates are unleashing some “pent-up demand from the last three to five years,” Elliott said. There’s strength in its financial-services division from asset-management firms seeking to hire senior managers, while business in global banking also is starting to pick up, he said.
The negative sentiment that’s dragged down the industry appears to be “bottoming out,” even though analysts including McHugh aren’t “expecting a V-shaped bounce back” in the near-term, he said. McHugh maintains “market perform” recommendations on CTPartners Executive Search Inc. (CTP:US) and Heidrick & Struggles and is “outperform” on Korn/Ferry.
For investors seeking positive sequential change, executive recruitment could be an interesting option, Ghriskey said. “This industry is starting to show some signs of a favorable risk-reward trade right now.”
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