RHI Stock Study (10-5-23)

Posted by Mark on January 3, 2024 at 06:42 | Last modified: October 5, 2023 12:32

I recently studied Robert Half Inc. (RHI) with a closing price of $73.59.

M* writes:

     > Founded in 1948, Robert Half provides temporary, permanent,
     > and outcome-based staffing for both in-person and remote
     > positions in the finance and accounting, technology, legal,
     > marketing, and administrative fields. Its subsidiary consulting
     > arm, Protiviti, specializes in technology, risk, auditing, and
     > compliance matters. The firm generates most of its sales inside
     > the U.S. and stands as one of the largest specialized firms in
     > the highly fragmented U.S. staffing industry. The firm
     > generates annual revenue of around $7 billion.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 4.7% and 11.8%. Lines are mostly up, straight, and parallel with a sales decline in ’20 along with EPS declines in ’16, ’17, and ’20. PTPM leads peer and most industry averages while ranging from 8.3% in ’20 to 12.4% in ’21 (and ’22) with a last-5-year mean of 10.7%.

Also over the past decade, ROE trails peer averages and is about even with the industry despite increasing from 28.0% (’13) to 43.6% (’22) with a last-5-year mean of 38.5%. Debt-to-Capital is lower than peer and industry averages as the company has no debt; the last-5-year mean is 13.8% (e.g. uncapitalized leases, rentals).

Quick Ratio is 1.3. Value Line gives an A+ rating for Financial Strength and M* rates “Exemplary” for Capital Allocation.

With regard to sales growth:

• CNN Business projects contraction of 6.9% YOY and 2.1% per year for ’23 and ’22-’24 (based on 12 analysts).
• YF projects YOY contraction of 11.3% and 0.3% for ’23 and ’24, respectively (14 analysts).
• Zacks projects YOY contraction of 11.9% and 0.6% for ’23 and ’24, respectively (5).
• Value Line projects 3.3% annualized growth from ’22-’27.
• CFRA ACE project contraction of 11.9% YOY and 2.9% per year for ’23 and ’22-’24, respectively.
• M* offers a 2-year ACE of 5.2% contraction per year and an analyst note projecting 5-year annualized growth of 3.2%.

I am discounting the long-term estimate to zero due to all the negative short-term projections.

With regard to EPS growth:

• CNN Business projects contraction of 25.2% YOY and 7.9% per year for ’23 and ’22-’24, respectively (based on 12 analysts), along with 5-year annualized growth of 0.8%.
• MarketWatch projects annualized contraction of 17.3% and 3.4% for ’22-’24 and ’22-’25, respectively (16 analysts).
• Nasdaq.com projects annualized growth of 8.3% and 25.1% for ’23-’25 and ’23-’26 (7/7/3 analysts for ’23/’25/’26).
• Seeking Alpha projects 4-year annualized growth of 0.8%.
• YF projects YOY contraction of 37.5% and 12.2% for ’23 and ’24, respectively (13), along with 5-year annualized contraction of 1.3%.
• Zacks projects YOY 38.3% contraction and 8.3% growth for ’23 and ’24, respectively (7).
• Value Line projects 4.5% annualized growth from ’22-’27.
• CFRA projects contraction of 38.1% YOY and 12.9% per year for ’23 and ’22-’24 along with a 3-year CAGR of +1.0%.
• M* projects long-term growth of 4.2% per year.

The data duplication concern is in play as two of the five long-term estimates are identical to the two decimal places given. These are CNN Business (FactSet) and Seeking Alpha (S&P Global), which are both at 0.78%. I will ignore because if duplicates, then the study is biased conservatively as I would like.

The mean of five long-term estimates is 1.8%. I will discount this to zero as my forecast. I will use ’22 EPS of $6.03/share [arbitrary] as high EPS and 2023 Q2 EPS of $5.04 (annualized) as [an arbitrary] low EPS in an effort to be conservative.

My Forecast High P/E is 17.0. Over the past decade, high P/E ranges from 17.7 in ’19 to 26.3 in ’14 with a last-5-year mean of 21.7. The last-5-year-mean average P/E of 17.0 is also my forecast and below the entire high P/E range.

My Forecast Low P/E is 11.0. Over the past decade, low P/E has decreased from 16.7 (’13) to 10.8 (’22) with a last-5-year mean of 12.4. I am forecasting near the bottom of the range (only ’22 is lower).

My Low Stock Price Forecast (LSPF) of $55.40 is default based on $6.03/share EPS. This is 24.7% less than the previous closing price and 14.4% less than the 52-week low.

Over the past decade, Payout Ratio ranges from 28.4% in ’21 to 50.4% in ’20 with a last-5-year mean of 34.1%. I am forecasting just below the range at 28.0%.

These inputs land RHI in the HOLD zone with a U/D ratio of 1.6. Total Annualized Return (TAR) is 8.6%.

PAR (using Forecast Average—not High—P/E) of 4.8% is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 43 studies (my study and 9 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 4.2%, 4.9%, 20.9, 13.9, and 34.1%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 18.5 is higher than MS (17.4) and higher than mine (14.0).

Even though my intent is 0%, the website interprets my EPS growth forecast to be 3.7%. Since the initial value ($6.03) is greater than the last quarter ($5.04 annualized), positive growth is calculated. I would affirm the above analysis to still be correct, however, because analyst growth estimates are understood to be projected from the last completed FY.

MS high / low EPS are $6.43 / $3.87 versus my $6.04 / $5.04 (per share). My high EPS is lower due to a lower growth rate and much lower than Value Line’s $7.50. With regard to low EPS, I am puzzled because the largest grouping of MS studies [13, which amounts to 29.5% of the total] uses a low EPS of $2.67 – $2.77 with nine at $2.69. I might argue this to be unreasonably low. 2020 EPS is a downside excursion to $2.70/share (30.8% YOY contraction presumably due to COVID-19). Before that, I have to go back to ’17 to find a lower EPS number ($2.33) and ’15 EPS is exactly $2.69. Why these studies think the company could regress so far is an unanswered question.

MS LSPF of $49.70 implies a Forecast Low P/E of 12.8: less than the above-stated 13.9. MS LSPF is 7.6% less than the default $3.87/share * 13.9 = $53.79, which results in more conservative zoning. MS LSPF is also 10.3% less than mine.

My TAR (>15.0% preferred) is much less than the 14.8% from MS. Despite a small MS sample size, MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG of 3.8 per my projected P/E is “significantly overvalued.” Relative Value [(current P/E) / 5-year-mean average P/E] per M* is slightly undervalued at 0.86. Kim Butcher’s “quick and dirty DCF” prices the stock at 17.0 * [$8.25 – ($2.72 + $0.70)] = $82.11, which suggests the stock to be 10.4% undervalued.

RHI is a BUY under $67. With a forecast high price of $102.70, TAR should meet my 15% criterion around $51/share.