Robert Half International: Could Get Worse Before It Gets Better (NYSE:RHI)

Robert Half International Inc. (NYSE:RHI) competes in the staffing and risk consulting services sector globally.

After hitting a five-year low of approximately $32.00 per share on March 23, 2020, Robert Half International Inc. fell to a 52-week high of $125.77 per share on February 7, 2022, before falling off the cliff to a 52-week low of $65.40 on October 17, 2022.

From June 20, 2022 it has been trading flat, moving in a range of $73.00 per share to $83.00 per share, outside of the temporary drop to its 52-week low mentioned above.

After missing fairly big in the latest earnings report, and with weakness in the labor market expected to remain in 2023, the company will struggle to regain momentum until the economy rebounds and the Fed signals where the interest rate top is going to be.

In this article, we’ll look at some of RHI’s recent numbers, the condition of the labor market, and how things are likely to play out in 2023.

Some earnings numbers

Revenue in the third quarter was $1.83 billion, up 7.06 percent year-over-year, but missing by $78.74 million. Currency exchange rates accounted for $45 million toward the decline in revenue in the reporting period.

Job placement in the U.S. generated $1.049 billion in revenue, while international job placement came in at $273 million. Its Protiviti unit generated $511 million in revenue in the quarter.

Net income in the quarter was $166 million, or $1.53 per share, missing by $0.11 per share. For the first nine months of 2022 net income was $510 million, or $4.65 per share, compared to $430 million, or $3.85 per share in the first nine months of 2021.

Cash and cash equivalents at the end of the third quarter were $593 million.

Confirming expected weakness in the sector, the company guided for fourth quarter revenue to be in a range of $1.695 billion to $1.775 billion, and net income per share to be from $1.31 to $1.41.

While management only guided for one quarter, it pointed to ongoing downward pressure on the labor market, even though its Protiviti segment may grow revenue at a slightly higher pace than job placement. If that’s how it plays out, it would result in lower gross margin because Protiviti gross margin is projected to be in a range of 27 percent to 29 percent, while job placement gross margin is projected to be from 38 percent to 40 percent.

A look at the labor market

Demand for labor remains high, but there are several factors that are keeping RHI from being able to meet that demand, most of which are outside its control.

One key element affecting the labor market is that the growing number of retirements in the U.S. are not going to abate, which means contrary to the recent past, many retirees aren’t returning to work. That has resulted in lower labor participation rates, which skew the unemployment numbers.

In October 2022, labor participation rates in the U.S. were down to 62.2 percent, down 1.2 percent from the 63.4 percent labor participation rate in February 2020. Expectations are that number is going to slightly increase to 62.3 percent in November, most likely from seasonal hiring demand.

The U.S. is by far RHI’s largest market, and management said “job openings and quit rates remain at elevated levels,” with the unemployment rate now at 3.5 percent, representing a 50-year low. As mentioned above, the number is skewed because of the low labor participation rate. That’s important to take into consideration because a growing number of people don’t want to work anymore, and RHI can’t make money on people that aren’t looking for jobs.

It’s even more challenging for RHI because the unemployment rate for people with college degrees looking for work is 1.8 percent, and that is representative of the majority of RHI’s job candidates. Citing the National Federation of Independent Business, RHI management said that 89 percent of small business owners looking to fill positions, there are very few if any qualified people applying for jobs, and 46 percent of small business owners aren’t able to fill job openings.

To understand the current job market we have to go back to the changes in the workforce that came from working at home during the pandemic. Once workers tasted of it, they liked it, and many of them don’t want to totally give up that option; it’s a trend that is likely to remain, albeit some employers are pushing back against it.

Something management said was changing in the job market was that its clients were starting to get more selective with candidates are want to have more face-to-face time with them before making hiring decisions. That suggests they are prioritizing local candidates for hybrid or onsite hires, resulting in the process taking longer.

There appears to be some compromise forming between employers and prospective employees, with a hybrid working model being offered by some companies, where there is some time spent working at home and some time working at the office.

Since the majority of those worker reflect the candidate base RHI targets to place, it could be a long-term tailwind for RHI if the trend remains in play, which is highly probable. And in specialized tech areas, a fully remote worker may be the best candidate for certain types of jobs. Again, this plays into the strength of RHI with its major focus on college-educated candidates.

While the strength of RHI is apparent in its job placement model, it also has a weakness in times like we’re in now because the tech sector is hit hard by rising interest rates which has slowed down business while cutting into margin and earnings. That catalyst will remain in play until the Federal Reserve slows down and ultimately, reverses its interest rate policy.

For that reason, I believe RHI is going to continue to go through some short-term pain, with its current share price likely to be tested going forward.

A positive thing about RHI and the sector it competes in is, while it can take some big hits quickly, it also has the propensity to rebound quickly once the market turns around.

Protiviti

Protiviti is the consulting arm of RHI, and works with companies to provide solutions in risk, compliance, internal audit and risk, among other challenges companies face.

With Protiviti, it provides some support from downside risk because it’s less susceptible to economic conditions.

Demand in the segment remains strong, specifically with “internal audit and regulatory risk and compliance practices.”

Revenue from the segment was $511 million in the third quarter, with $416 million coming from the U.S., and the remaining $95 million from international markets.

Protiviti revenues from the U.S. were up 4 percent year-over-year, and international revenues were up 5 percent year-over-year.

Of the $89 million in revenue from the public sector, Protiviti accounted for $63 million of that. Expectations are public sector revenue is going to drop by about 6 percent for the full year, which may have a slight, negative impact on Protiviti.

Even so, in the third quarter, revenue in the segment was up 55 percent from the third quarter of 2021, and while it’s unlikely to continue at that pace, demand going forward should partially offset the expected slowdown in job placement.

Conclusion

Considering the current economic conditions, the tight labor market, low labor participation rates, and changes in the way people want to work, RHI is facing some headwinds that are going to take a while to work through in its job placement business.

This is especially true in tech, which is disproportionately affected from high interest rates which cut into margins and earnings, which results in declining revenue and profits. The result of that is either shrinking the work force or cutting back on hiring.

Either way, RHI will take a hit from that part of the market, and depending on how severe and long the recession is through 2023, it will probably result in lower labor demand through most of the year. Since the company focuses primarily on college educated workers, it may not be hit as hard as some of its peers, but it will still reduce the number of employers looking for workers at the macro level, by which I mean there will always be some segments of the market looking for workers, especially those with specialized skills that are in high demand.

As for how this plays out for RHI, in the near term I think it’s going to be difficult to overcome the current headwinds the company faces, and it’s more likely to drop below tight trading range it has been in over the last six months or so, than it is to push above it.

But as mentioned earlier, Robert Half International operates in a market sector that can gives as much as is taken away in a fairly short period of time. So while there isn’t much in the way of tailwinds in the near term, further out, when the economy strengthens, I expect the share price of RHI to rebound strongly.

For now it is probably best to wait for pullbacks in the RHI share price and get good entry points that will result in excellent returns over the long term, while also getting a better dividend yield as a result of the lower cost basis.