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The following segment was excerpted from this fund letter.
HireQuest (NASDAQ:HQI)
What recession? On the heels of the July 2022 jobs report that showed 528,000 jobs added, a 3.5% unemployment rate, and a 5.2% wage growth number HireQuest, a staffing branch franchisor, reported 41% organic revenue growth and 63% overall revenue growth number this past quarter. A tight demand market for labor, higher wages, and the company’s franchise operator model continues to deliver on all cylinders. HQI continues to highlight the difficulty in predicting macro factors to fundamental results.
While we have now had two quarters of negative GDP growth there are nearly 2x as many open jobs as there are people who are employed seeking to fill them. According to HireQuest’s CEO, Richard Hermanns, it will take quite a few layoffs or cutbacks on planned hirings before “we get to a point that our overall demand will be affected. Demand has remained very strong and frankly, beyond our capacity to fill it. I would say that our abilities to fill orders are improving somewhat …but not enough to offset the gap between what our orders are and what our supply is.”
On the other hand, the company’s strategy of expanding both via M&A (five acquisitions in the last year completed and integrated) and organically, (new offices opened in Boston and Chicago, by existing franchisees) continues to deliver. With an acquisition target market of 44,000 staffing companies in the US, we believe that we are still in the very early innings of HireQuest’s growth.
We expect the $220mm market cap company to deliver over $21mm in Free Cash Flow in 2022. The macroeconomic uncertainty leaves our projections at what we consider conservative: $25mm and $30mm for 2023 and 2024 ($32.5mm/$39mm EBITDA) and a near-term price target of $26.00, or 80% upside from here. The current valuation, at what we consider a sustainable 10% Free Cash Flow yield, provides a significant margin of safety. We are likely to see more upside to these numbers with stabilization and more confidence in the fundamental economic factors as well as additional M&A.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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