Report
Joshua Aguilar
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Morningstar | Robert Half and Manpower Will Benefit From Tight Labor Markets, but Shares Are Fairly Valued

After reviewing our revenue and margin assumptions for Robert Half and Manpower, we are maintaining our narrow-moat and stable moat trend rating for Robert Half as well as our no-moat and stable moat trend rating for Manpower. However, we are lowering our fair value estimate for Robert Half to $56 from $71 and for Manpower to $87 from $103. Currently, both staffers look fairly valued following our updated valuations, and of the two, we prefer Robert Half because of the pricing power it commands over its clients. Robert Half’s industry-leading adjusted ROICs have led us to assign the firm an exemplary stewardship rating and Manpower a standard stewardship rating. Both staffers warrant a high uncertainty rating as they operate in a highly cyclical industry.

Robert Half targets mostly small- to medium-sized businesses (70% of its client mix) less likely to have in-house human resource functions and that are more willing to enter into exclusive contracts. Alternatively, Manpower’s client mix is predominately composed of multinationals (58% of 2018 revenue) with more bargaining power than small- to medium-sized businesses, bringing pricing pressure and non-exclusive contracts. Additionally, Robert Half specializes in higher-skilled accounting, finance, and IT placements as opposed to Manpower, which focuses on lower-skill manufacturing placements. We expect both firms will benefit from tight labor markets and the continued shift to recruitment outsourcing. That said, we give the nod to Robert Half and its reputation in matching higher-skilled professionals with clients looking for qualified candidates.

Robert Half’s narrow economic moat is based on intangible assets and network effects even within a highly fragmented staffing industry. Its brand strength, reputation, and centralized database benefit employers looking for qualified candidates willing to accept hard-to-fill positions. Furthermore, Robert Half’s ability to place job candidates seeking positions in highly skilled professions yields pricing power over clients. In temporary placements, we estimate the firm bills clients on average 40% to 60% higher than local or regional staffers. In permanent placements, we estimate the average fee staffing firms charge is between 15% to 20% of candidates’ annual salaries compared with Robert Half which charges between 20% to 25%. Furthermore, Robert Half has grown revenue per employee at a much faster pace than inflation. Revenue per employee in both temporary and permanent placements grew annually, on average, approximately 4% versus 2% annual growth in the U.S. Consumer Price Index since the year 2000.

In addition to intangible assets, Robert Half has built a two-sided network effect. Each candidate or employer that’s added to the network adds value to both new and existing users, which increases the probability of job placements. From the candidate side, Robert Half’s recruiters put qualified candidates in the front of the line as opposed to being one in several hundred resumes. Moreover, the firm helps refine candidates’ interview skills, making them more attractive candidates as well as providing candidates access to unpublished jobs. From the client side, Robert Half saves clients that don’t have back-ups from being too slow-footed, which results in a costlier and lengthier search for less-than-ideal candidates.

Manpower displays some elements of intangible assets and network effect moat sources, but not strong enough to warrant a narrow moat rating. Nonetheless, Manpower has built a centralized database to help match candidates and employers alike, but the firm operates in a fiercely competitive global staffing market with Adecco, Randstad, and Robert Half. What’s more, multinational clients enter into non-exclusive contracts with Manpower and its competitors (Robert Half’s small and medium size business exposure allows it to enter into more exclusive contracts) limiting its ability in becoming the preferred supplier of job candidates. Conversely, it is in candidates’ best interests to sign up with as many recruiters as possible to increase the probability of securing employment. We believe this diminishes Manpower’s network value. Manpower’s intangible assets fail to create pricing power with clients as evidenced by lower operating margins (approximately 2% in midcycle) in comparison to Robert Half (approximately 7% in midcycle).

Manpower’s multinational exposure makes the firm more likely to give pricing concessions in favor of job or position volume from clients. Additionally, larger businesses can bring recruiting activities back in-house, relying on internal candidate databases built over time--another source of pricing pressure. New entrants face low barriers to entry in placing workers in industrial and construction positions given the lower-skill requirement of manufacturing jobs. Manpower’s largest regional exposure is Southern Europe (43% of consolidated revenue) where industrial exposure is nearly 73% of the region. The high-volume commoditized nature of Manpower’s job placement services prevents the firm from earning returns on invested capital on par with competitors.

Although employment regulations are trending positively in many European countries, we see regulation changes in some regions as an additional cause for concern. In France, the replacement of CICE tax credits (tax credits put in place to lower employer payroll expenses to improve competitiveness) with new subsidies should slightly lower Manpower’s gross profit margins by approximately 15 basis points. In Germany, changes to temporary placement contract lengths and rising wage requirements prove to be challenging. Overall, pro-employment subsidies can increase demand in certain markets, but countries adopting more stringent labor laws often cause pay rates to climb, as regulations specify pay scales, benefits, or other contract terms. Such mandates can squeeze pay-bill spreads if Manpower and Robert Half fail to either anticipate key changes in employment laws or pass along rising costs to clients on a timely basis.
Underlying
ManpowerGroup

ManpowerGroup provides a range of workforce solutions and services, which includes recruitment and assessment, training and development, career management, outsourcing, and workforce consulting. Its brands and offerings includes Manpower, Experis, Right Management and ManpowerGroup Solutions. The company's portfolio of recruitment services include permanent, temporary and contract recruitment of professionals, as well as administrative and industrial positions, which are provided under its Manpower and Experis brands. Experis focuses on the areas of information technology, engineering, and finance, while Right Management is focused on talent and career management workforce solutions.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Joshua Aguilar

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