March 04, 2015 Robert Half International Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 08/19/2012 Current Price (03/03/15) $62.70 Target Price $66.00 52-Week High $63.00 52-Week Low $39.74 One-Year Return (%) 52.87 Beta 1.41 Average Daily Volume (sh) 715,321 Shares Outstanding (mil) 135 Market Capitalization ($mil) $8,465 Short Interest Ratio (days) 3.48 Institutional Ownership (%) 86 Insider Ownership (%) 4 Annual Cash Dividend $0.80 Dividend Yield (%) 1.28 5-Yr. Historical Growth Rates Sales (%) 9.9 Earnings Per Share (%) 56.9 Dividend (%) 7.8 using TTM EPS 27.7 using 2015 Estimate 23.5 using 2016 Estimate 20.8 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page (RHI-NYSE) SUMMARY Robert Half reported better-than-expected fourthquarter and 2014 results backed by consistently increasing demand for staffing services. Earnings of $0.62 per share grew 26.5% from the prior-year quarter, driven by top-line growth and margin expansion. Revenues increased 13% year over year, driven by solid demand for services provided by skilled professionals as well as growing labor market in the U.S. Protiviti once again delivered strong revenues. The company s gross and operating margins also improved driven by higher revenues. Overall, we are impressed with Robert Half s international operations, which have improved in the recent quarters. However, the company cannot escape from currency fluctuations. Moreover, the company might have to incur higher health care costs in 2015, which keeps us on the sidelines. Risk Level * Low, Type of Stock Large-Growth Industry Staffing Zacks Industry Rank * 88 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 1,024 A 1,063 A 1,075 A 1,084 A 4,246 A 2014 1,084 A 1,165 A 1,224 A 1,221 A 4,695 A 2015 1,210 E 1,279 E 1,338 E 1,354 E 5,181 E 2016 5,659 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.40 A $0.46 A $0.48 A $0.49 A $1.83 A 2014 $0.45 A $0.55 A $0.63 A $0.62 A $2.26 A 2015 $0.56 E $0.67 E $0.73 E $0.71 E $2.67 E 2016 $3.02 E Projected EPS Growth - Next 5 Years % 16 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Founded in 1948 and headquartered in CA, Robert Half International (RHI) is one of the world s largest providers of temporary staffing, project professionals and permanent placement services to the finance and accounting industries. Robert Half focuses primarily on the accounting and finance sector, with some exposure to other growing sectors as well. Its skilled professionals cater to the increasingly specialized needs of clients. Based on the nature of services, the company has three reportable operating segments: Temporary and consultant staffing: The temporary and consultant segment provides specialized staffing in accounting and finance, administrative and office, information technology, legal, advertising, marketing and web design fields. Permanent placement staffing: The permanent placement segment provides full-time personnel in accounting, finance, administrative and office, and information technology fields. Risk consulting and internal audit services: The risk consulting segment provides business and technology risk consulting and internal audit services. Revenues from temporary and consultant staffing and permanent placement staffing come under the global staffing division, while the risk consulting and internal audit services are provided under the Protiviti division. REASONS TO BUY Growing Demand for Professionals in the U.S. and Internationally: Robert Half s revenues have grown year over year for the past four years, driven primarily by broad-based and increasing demand for its professional staffing services, particularly in the U.S. The company s international operations have also been improving since the first quarter of 2014, driven by higher demand for permanent placement services. The rising staffing needs of the company s clients and gradual improvement in economic conditions and job markets in the U.S. increased the demand for temporary workers as a percentage of total U.S. employment. In fact, companies are increasingly using temporary and consulting professionals as a permanent part of their human resource mix due to the provisions of the Affordable Care Act. More than half of the new-job growth predicted through 2020 is expected to come from this arena. The company is thus well positioned to benefit in the current U.S. macro environment. With the current improvement in the labor market, the company expects to invest in people and infrastructure to support business expansion and generate accelerated global revenues in the near term. Increasing Growth from Protiviti: Protiviti has been contributing significantly to Robert Half s revenues and operating growth for the past many quarters, driven by gradual economic recovery in the country. A global consulting firm, Protiviti, helps companies solve problems in finance, technology, operations, governance, risk and internal audit. Protiviti has been witnessing continued growth in all consulting solutions, particularly in IT consulting, risk and compliance, and internal audit. Client demand has been fueled by improving Equity Research RHI Page 2
market conditions and a more stringent regulatory environment. With an improving economic picture, the company expects the momentum to continue in the upcoming quarters as well. Acquisitions to Expand Business: Robert Half has expanded its business in the recent past through acquisitions and business agreements. With purchase of the assets of privately-held U.S.-based SusQtech Inc. in Dec 2013, the company can now provide software consulting services to its key clients. SusQtech s customer support services have also contributed to Protiviti s IT consulting portfolio, which provides a wide range of software services. In Oct 2013, Protiviti collaborated with technology services provider Xchanging to provide legal and regulatory compliance related services to Southeast Asian customers. In Aug 2013, Protiviti expanded its presence in the emerging market of South Africa through an agreement with SizweNtsalubaGobodo Advisory Services (Pty) Ltd. (SNG Advisory). Cash Deployment through Dividends and Share Buybacks: Robert Half regularly returns shareholder value through dividend payments and share buybacks. The company has been paying cash dividends since 2004 and increased dividends every year including the latest hike of 12.5% in 2014. REASONS TO SELL Higher Health Care Costs: According to the health care reform or The Affordable Act signed in 2010, employers will have to provide health insurance that meets certain coverage, value or affordability standards to its employees. Robert Half has thus redesigned its employee benefits to offer health insurance coverage in 2015 to its temporary candidates in a way that it believes will meet the requirements of the employer mandate. These health plans may significantly increase the health care-related costs of the company s temporary staffing operations. Currency Headwinds and Uncertainties in Europe: Fluctuations in currency values have an adverse impact on the profitability of the company as Robert Half derives a considerable portion of its revenues from foreign countries. As a result, fluctuations in the value of foreign currencies against the U.S. dollar, particularly the Canadian dollar, British pound, Euro and Australian dollar will impact its results. The company also derives a significant portion of its business from Europe. The economic uncertainty in the European market is adversely affecting the company s operations in the region, despite moderate improvement in the region. RECENT NEWS Robert Half Beats Earnings Again on Higher Staffing Demand Jan 30, 2015 Robert Half reported better-than-expected fourth-quarter and 2014 results backed by consistently rising demand for staffing services. Fourth-quarter 2014 earnings of $0.62 per share exceeded the prior-year quarter adjusted earnings of $0.49 by 26.5% and beat the Zacks Consensus Estimate of $0.61 by 1.6%. Earnings matched the higher end of management s guidance range of $0.57 to $0.62. Robert Half witnessed strong year-over-year earnings growth driven by solid demand for services provided by skilled professionals as well as growing labor market in the U.S. The company s international operations also improved, particularly driven by higher demand for staffing and consulting services. In Equity Research RHI Page 3
fact, the company s earnings have now grown in double digits for 19 consecutive quarters on a yearover-year basis. Robert Half's total revenue grew 13% year over year to $1.22 billion, marking the fifth consecutive quarter in which demand for staffing and consulting services accelerated. On a constant currency basis, revenues grew 15%. Revenues were at the higher end of management s guidance range of $1.18 $1.23 billion. It also beat the Zacks Consensus Estimate of $1.21 billion by 0.8%. Total gross profit was $500.8 million, up 13% year over year. Gross margin expanded 10 basis points (bps) to 41% driven by higher sales. Total operating income surged 28% to $133.2 million. Operating margin increased 130 bps to 10.9% on the back of higher gross margins and solid Protiviti results. Segment Details Based on the nature of its services, the company has three reportable operating segments namely, Temporary and Consultant Staffing; Permanent Placement Staffing and Risk Consulting and Internal Audit Services. Revenues from Temporary and Consultant Staffing and Permanent Placement Staffing come under the global staffing division, while the Risk Consulting and Internal Audit Services are fall under the Protiviti division. Global Staffing Division: Global Staffing revenues, on a constant currency basis, increased 14% year over year, driven by 15% growth in U.S. revenues and 11% improvement in international revenues. Currency had a negative impact of 1.9%. Overall, staffing gross margin expanded 40 bps to 42.7% led by solid margin in Temporary and Consultant Staffing and Permanent Placement operations. Operating margin of the staffing division was 10.7%, led by 9.9% in Temporary and Consultant Staffing operations and 17.8% in Permanent Placement operations. Protiviti: On a constant currency basis, Protiviti s revenues increased 22%, driven by 27% growth in U.S. revenues and 5% increase in international revenues. Segment gross margin was 30.7%, down 110 bps from the prior-year quarter while operating margin was 12.4%. 2014 Results In 2014, earnings of $2.26 per share exceeded the prior-year figure of $1.83 by 23.5% and beat the Zacks Consensus Estimate of $2.24 by 0.9%. Total revenue grew 10.6% year over year to $4.70 billion. It also beat the Zacks Consensus Estimate of $4.69 billion by 0.8%. Financial Update Robert Half had cash and cash equivalents of $287.1 million at the end of the fourth quarter compared with $290.9 million at the end of the third quarter. Capital expenditure was $27 million in the fourth quarter, as against $13 million in the previous quarter. During the quarter, the company paid cash dividend of $0.18 per share to stockholders on Dec 15, 2014 and repurchased 0.8 million shares for $46 million. At the end of the fourth quarter, approximately 4.8 million shares were available for repurchase under the plan. Equity Research RHI Page 4
First-Quarter 2015 Guidance Robert Half issued earnings and sales guidance for the first quarter of 2015. The company expects revenues in the range of $1.195 $1.245 billion, representing an increase from $1.08 billion recorded last year. The company also expects earnings in the range of $0.53 $0.58 per share, as against $0.45 in the comparable period last year. VALUATION Robert Half s current trailing 12-month earnings multiple is 27.7x, representing a discount of 77.8% to the industry average of 35.6x. Based on 2015 earnings estimate of $2.67, the stock is trading at 23.5x, an 16.9% premium to the industry average of 20.1x. At the end of the fourth quarter of 2014, the P/B multiple of the stock was approximately 8.6x, a significant premium to the industry average of 3.3x. The valuation looks fair with ROE of 31.7x, which is above the industry average of 19.3x. Our target price of $66.00 is based on approximately 24.7x our 2015 earnings estimate. On a P/B basis, the price target is based on a P/B multiple of approximately 9.1x. Robert Half holds a Zacks Rank #2 (Buy). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Robert Half International, Inc (RHI) 23.5 20.8 16.0 24.0 27.7 NA 19.4 Industry Average 20.1 16.4 16.3 17.2 35.6 NA 13.6 S&P 500 16.8 15.6 10.7 14.9 18.4 18.4 12.0 Kelly Services, Inc.-A (KELYA) 19.0 13.8 12.8 22.2 33.1 6.0 Kelly Services, Inc.-B (KELYB) 12.8 22.1 32.6 6.3 Insperity, Inc. (NSP) 31.0 26.5 25.1 44.9 43.9 15.5 Trueblue, Inc. (TBI) 13.4 11.6 10.0 11.0 15.5 56.4 14.8 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Robert Half International, Inc (RHI) 8.6 8.6 3.9 31.7 0.0 1.3 15.0 Industry Average 3.3 3.3 3.3 19.3 0.2 0.7 4.9 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research RHI Page 5
Earnings Surprise and Estimate Revision History Equity Research RHI Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of RHI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1105 companies covered: Outperform - 16.5%, Neutral - 78.2%, Underperform 4.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Research Analyst Copy Editor Content Ed. QCA Lead Analyst Reason for Update Sneha Nahata Debasmita Banerjee Kinjel Shah Kinjel Shah Sneha Nahata 3Q14 Earnings Equity Research RHI Page 7