Happy Labor Day! Manpower $MAN, HireQuest $HQI, and ZipRecruiter $ZIP

I remember when I was young and Labor Day was about having a day off from school and possibly even a barbeque.  It was long before I learned about the Marxist paradigm of the bourgeoisie versus the proletariat.  Even in today’s world where the typical employee with a 5% 401k match with compound interest will earn more as a capitalist than through their labor, this flawed paradigm of exploiter and exploited persists, giving validation to one of the most destructive human instincts, envy.  On a day like today, when nobody seems to know just which phase of the business cycle we are in, I want to check in on employment agencies.

With so much talk about the cooling labor market with regards to Jerome Powell and interest rates, I am surprised I haven’t checked in on this sector sooner.  I have been a bit over concentrated on the commodity supercycle thesis, which while almost certainly correct, is of unpredictable timing.  I don’t want to miss the catch-up, but I also should have a few other ideas in the meantime if commodities stay depressed for a few more years.

Listening to earnings calls of the staffing and employment services companies, even if I don’t find something to buy, gives a lot of insight into the state of the overall economy.  The Great Resignation has transformed into the Big Stay, as employees who negotiated various perks during Covid do not want to change employers with the knowledge that many of those perks will not be available again.  Also, tech’s year of efficiency is now in month 18 since the Feb 2023 announcement by Mark Zuckerberg, tech hiring is still depressed.  

The management of ZipRecruiter (ZIP), who while small, have access to the data of many other private online job search platforms through various sharing mechanisms, claims that there are some data points that indicate the hiring market might be reaching its trough.  They claim the rate of the worsening of the hiring market has almost completely stopped, and a few metrics even turned up slightly.  This matches Goldman Sachs’ estimate for next week’s payroll numbers which predict unemployment falling from 4.3% to 4.2%. 

The staffing services companies themselves are in a massive state of flux, some of them appear to be taking market share, other are below their 2019 performance, but that interpretation could be flawed as they might behave differently depending on whether they are more exposed to hiring for government jobs and healthcare.  So there is a massive state of uncertainty clouding the entire category, and uncertainty is great at lowering stock prices. 

Is it too early to buy some of the staffing services stocks?  Well, I haven’t ticked the bottom, but I’m hardly late to the party.  

Manpower (MAN) is trading at just a bit more than half of the 2021 peak, but their revenues are below 2019 levels.  It’s not obvious if they are losing market share to competitors, or are just less exposed to government and healthcare hiring which is still strong.  They only have insider selling, and seem to be controlled by professional bureaucrats.  But an $18 billion revenue company selling for $3.5 billion is cheap, and sometimes that’s enough.  For people who are interested in trading on macro trends, if you nail the timing of hiring picking up, you could probably get a double from MAN.

HireQuest (HQI), is a bit smaller than I usually am willing to entertain, but I place a lot of importance on insider buying.  HQI hasn’t had an insider sell a share since 2009, and the buying has been aggressive.  With only 14 million shares outstanding, the CEO, Richard Hermanns, owns over 3 million shares, and buys more almost every month.  A director and a large Häagen-Dazs franchisee, Edward Jackson, owns another 2 million shares and buys often as well. Five other directors are regular buyers, but they don’t have such large ownership stakes in the company. 

HQI is a staffing agency franchisor, which provides for extremely stable income, hardly decreasing during this soft period for employment.  Also, they are engaging in an aggressive rollup, making multiple small purchases of competing staffing agencies every year.  Revenue has tripled since going public in 2019 at $7 a share, and the price sits at $14.24 today.  Paying 20x free cash flow doesn’t feel cheap, but for a company that doubled tangible book and tripled revenue in four years, there is a good chance they will outperform.

But what catches my attention is ZipRecrutier (ZIP).  Looking at my own portfolio, the biggest pain trade for me would be if the eventual rotation out of large cap tech didn’t go to small cap value, but went to small cap tech instead, and that rotation is a distinct possibility.  The Cathie Wood type stocks have been bouncing around the bottom of their charts for two years, meanwhile many of them have had dramatic fundamental improvement under the surface.  

The staffing services market is only somewhere around 5% to 10% online, the rest is still done the old-fashioned way, inefficiently.  Is there any doubt that with the advancement of large language models, that number won’t be at least 50% online within ten years?  

Most of the online competition is unavailable for direct investment.  Career Builder is owned by Apollo, Indeed and Glassdoor are owned by Recruit Holdings of Japan, Monster is owned by Randstad, and Linkedin is owned by Microsoft.  I believe that small cap tech companies might find a niche in being unaffiliated with the giants, as data becomes more valuable, some businesses won’t want Microsoft knowing even more about them than they already do.  This thesis has been behind the recent runup in Coastal Financial Corporation (CCB) as WalMart has chosen them to manage their credit card program rather than allow their data to be used by someone much larger who might be able to do something with it.

ZIP’s recent performance isn’t stellar, but while the overall employment services market is down 10% compared to 2019, ZIP’s revenue is up 12%, so they are taking market share, albeit slowly for a tech company.  Also, their costs are highly flexible, so even though revenue has been cut in half since the post Covid boom, their costs have been cut by even more, and margins have expanded.  There isn’t any insider buying, but the founders are still involved and still own about 30% of the company.  Incentives are aligned, but I always feel better if insiders are buying. 

Trading at just under 2x revenue, while it doesn’t feel cheap at first glance, that is very cheap in the tech world for a company with an 89% gross margin.  Their growth is impossible to tell with the extreme cyclicality, but peak revenue was double their current $500 million trailing twelve month revenue.  Also, not only has ZIP generated $77 million of free cash flow in the last twelve months, but they are sitting on a $500 million cash horde.  Tangible book is less impressive, as they do have about the same amount in long term debt. ZIP is trading at a market capitalization of just about $1 billion, which is exactly where they were valued privately in 2018.  

Like all tech companies they are collecting data, refining processes, and learning their market as they go.  One of their most impressive metrics is the increase in revenue per business customer as they deepen the relationship.  With constant improvement and tailoring toward the employers needs, revenue from the 2016 cohort has increased 6x over the last 8 years.  

Management estimates their revenue growth at around 15%, looking through the cyclicality.  If ZIP emerges from the other side of this hiring slowdown and returns to $1 billion of revenue, a similar tech company would be valued at somewhere around 4x to 6x sales.  Given the current market capitalization of just under $1 billion, I think there are pretty decent odds that ZIP could be a 4x within two or three years.