Robert Half International: It’s Cheap, But For A Reason (NYSE:RHI)

Dear readers/followers,

Robert Half (NYSE:RHI) is a California-based Human resources management company. I’ve had the company on my US mid-cap radar for some time, and it’s part of my long-term overall watchlist of companies that might become interesting. In 2022, the company gave a sudden drop, which put it close to, and at times below my “BUY” target. However, there were good reasons for this drop.

In this article, I’m initiating coverage on Robert Half – but that coverage comes with a lukewarm “HOLD” recommendation. While there are prices to buy Robert Half, and the company might be appealing at certain prices, this price we’re seeing here is not one of those.

And here is why.

Robert Half – Presenting an HR company.

Now, analyzing and looking at Human Management, staffing, and employment services is an interesting experience for me. Why?

Because I own and manage/run one.

It’s obviously far smaller than RHI, and it faces different challenges, being in the native Swedish geography only, but some of the interplays and ebbs and flows are somewhat similar. And I can tell you the obvious correlation between an HR company and employment, how it does, and the overall unemployment/employment flows. It’s not as simple as that, of course – in my own field, I’ve made sure to mix various employment fields and end markets to make sure that a downturn in one is usually followed by an upswing in another.

Robert half is of course bigger, which means that the potential downturns are bigger, and its exposures are more mixed. The company has 14,600 employees that generate around $6-$7B worth of revenues, from which it makes 39-42% gross margins, down to around 7-13.5% OM, and a net income margin of 5-9% overall. Not bad numbers, especially when you consider the scaling difficulties you run into in this sort of business, and how quickly costs can turn when you move into a negative macro, such as the one we’re in now.

Robert half is an international business. It has NA, SA, APAC, and EMEA exposure, and despite you maybe not having heard of the company, it’s one of the most recognizable staffing and consulting/recruitment firms, and the company has been around for over 70 years. The company pays a dividend, and that dividend is currently around 2%, safe even on the basis of declining forecasted earnings numbers.

The company may have representation outside the US, but the sales mix is decidedly skewed, which is why I consider it a US-based business. These are the solutions revenues…

…where continental Europe is 9% of the mix. The company offers 3 different types of service/placements, contract talent solutions, permanent placements, and Protiviti.

In terms of what the company’s staffing solutions know and are “experts” in, much is in Finance/Accounting (70%+), with the rest in admin/customer support and 19% in tech.

The company’s arguments to clients are the same as I use. RHI provides specialty and expertise workers – because only full-time jobs require full-time staff. Sometimes you want to outsource certain functions to get outside eyes on things or to make things more efficient, or because a company like RHI can find better candidates than you might be able to. The quality of a worker/consultant is absolutely key here, and the tolerance for lackluster quality is zero. This also enables organizations to relieve themselves of poor matches/compatibility in terms of staff in a much quicker way than if we were looking at severance packages or responsibilities for the company letting someone go.

RHI provides a full-spectrum selection of talent and consulting solutions. The company has also seen an increase due to remote/hybrid working, which is something I do not work with. But it offers RHI to access a global database, leveraging its brand strength and awareness. RHI has also started using AI to increase matching efficiency.

RHI has a significant advertising spend, which has made it one of the more recognizable names in the industry for the past 20+ years, both in traditional and new media. A look at the company’s historical revenues and earnings confirms the picture that the correlation to the overall market is strong.

Conversely, it means you want to “BUY” the business when it’s being undervalued due to either expectation for unemployment, or actual facts in unemployment. Enterprise results go negative in terms of growth in times of poor growth, only to go massively positive to 39-40% revenue growth in better times. There is some variance in how the US/International markets work here, but it’s very slight and not really worth focusing on.

Margins also go down in times of trouble – trough, like during Dot-com, is around 2-3% segment income, and tops at around 11.2%.

The company’s arguments are found in fundamentals. Why? Because RHI has zero debt, it has a net cash position of nearly $600M and manages assets of almost $3B. Almost all of the FCF is returned to shareholders, both in the form of buybacks and in the form of dividends. RHI has paid a dividend since 2004, and the company has compounded and grown this dividend by a double-digit 11.4% since its inception.

RHI has also reduced the number of shares substantially for the past 10 years, as well as other time periods.

RHI is a solid, industry leader when it comes to ROIC and it’s up to almost 45% here.

From a high level, RHI is exactly the sort of business I like investing in. It has:

• No Debt
• A growing, safe dividend
• A business I understand intimately.
• An active, shareholder-friendly policy of buybacks coupled with payouts of FCF, while maintaining good profitability and not skimping on quality.

Granted, if the company reinvested its FCF into the business instead of paying it out, the returns, growth, and earnings could probably be higher. The way this company manages its capital seems to at least suggest that it could grow faster, but at the same time, this industry is very dangerous to try and grow too quickly in – because you can very easily outspend SG&A without seeing too much sales revenue dollars coming in from that investment – especially if done in a pressured market.

And I don’t want to say that the company has grown poorly – because the exact opposite is true. Take a look at these numbers.

So, a decent amount of valuation volatility right here, and at first glance, it does seem that the company should be attractive here, doesn’t it?

Well, hold your horses.

Robert Half International – The valuation is tricky

The company’s EPS growth rate has been going down for the past few years. What was once 20-30% is now around 10% on average. RHI trades at a normalized premium of 18.5x on a 10-year basis, with a current valuation of 14.35x. By all accounts, this is still decent.

However, this fails to take into account the near-term issues the company is facing, and this is why you can’t just look at historicals when evaluating a company. The historicals for RHI look excellent, but I have very little doubt that a patient investor will have a far more attractive entry point within the next 12 months that could result in close to 15-17% normalized annual RoR.

On a 15x normalized basis, this rate of return here is now no more than 7.91%, which is below my 8% minimum target.

Even if we consider the company’s premium, that upside here is “only” around 15% annually, and that’s at a close to 19x forecast – which is really too high considering the market situation we’re currently going into. The current forecast is that RHI will move the same way as the macro and unemployment do. That’s what staffing and employment-related companies do. While you could argue we could avoid a recession and the corresponding massive drop in employment, looking at numbers out of tech and the rest, that’s a pipe dream as I see it here.

We can see this sentiment shared by most analysts. RHI is currently trading at $84, which may seem like a good overall share price for the business. But 12 analysts following the company go from $60 to $100, averaging at $75. That’s an 11.5% downside from today’s valuation. Out of those 12 analysts, only one has a “BUY” on Robert Half at this point.

I would go so far to as say the company could deliver positive RoR and potentially even Alpha at this time, but I would see the risk/reward ratio here as somewhat, unfortunately, skewed. We can add to this forecast and peer analyst view with a DCF model, which works fairly well given the company’s EPS growth rate history – but we do need to heavily discount the company in the near term. Using DCF here without it would not take into account short-term risk, and we’d get targets over $90/share. So, I impair with a higher discount rate and a terminal growth rate in the single digits, which still gives us around $79-$88/share here. I believe this to be perhaps somewhat more accurate than the analysts following the company, given the potential for growth and RoR here in the long term.

In the end, though, I want to better account for the near-term risk to Robert Half’s-near term 1-2 year EPS – because I’m inclined to believe it’s going negative.

Peers for the company come in the form of Randstad N.V., Adecco, and others, but none really on the US market for professional services such as this one, though Equifax (EFX) does exist, of course. On an international level compared to peers, Robert Half is actually quite expensive. Adecco and Randstad are far cheaper, and I own shares in Randstad myself.

I want to own Robert Half as well – but I will be waiting until things get more attractive, which I believe they will this year as we see more of the impacts of the job market on company earnings.

For that reason, I impair RHI by around 15% and give it a PT of $75/share before I’d be willing to buy shares here. I also would forecast it on a 15x P/E basis, not the premium. International peers are just as good or better, and they are far cheaper, so I don’t see a good reason for the premium.

This leads me to my current thesis for Robert Half.

Thesis

• Robert Half International is an attractive, but not-IG-rated human resources, staffing, and consulting firm. It’s a sector I know well. I like investing in these companies because their services are more or less always needed across the job market, but they do work with a high correlation to that job market. For that reason, it pays off to be very aware of the macro and potential downturns, as we’re seeing here.
• I would say Robert Half needs to be impaired in terms of valuation to 15x P/E and you should consider how the current downturn could influence the company’s valuation. I see potential pressure in the near-term from a macro as the company’s demand sees impacts from the job market.
• For that reason, I impair Robert Half, and give the company an initial PT of $75/share. That makes this one a “HOLD” here.

Remember, I’m all about :1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

The company does not fulfill my conservative forecast/upside criteria, nor is it cheap. For that reason, I say “HOLD”.