The Inside Scoop on Staffing Companies

The Inside Scoop on Staffing Companies
By Kristan Rowland
Morningstar, 08-25-06

The aging United States workforce boasts broad implications for the country. The 78 million strong baby boomer population (those born between 1946 and 1964) not only controls much of the nation's net worth and makes up about half of U.S. discretionary spending, but it also accounts for a significant portion of the U.S. labor force. According to the Bureau of Labor Statistics, the 55 and older age group is projected to gain share of the U.S. labor force, from about 16% currently to 21.2% by 2014. Let's take a look at how an older workforce might create some investing opportunities in the staffing industry.

According to IDC, a global provider of industry information, about 19% of the entire U.S. workforce holding executive, administrative, and managerial positions will retire in the next five years, which we think bodes well for firms like Heidrick & Struggles HSII . It is the leading executive search firm that fills the most-senior-level positions and enjoys a 50-year history. This firm's strong brand and network will be the keys to its success. We think that the firm will continue to attract talent given its huge share of topnotch employment opportunities. Furthermore, with this looming talent shortage, companies are likely to rely more heavily on Heidrick & Struggles given its long history and extensive unparalleled network of relationships. Also, companies may be forced to pay more for talent, given supply constraints. Heidrick & Struggles should benefit from this trend, as its per-placement revenues are based on the size of executives' first-year pay packages.

Current baby boomer spending habits, a lack of savings, increased longevity, and lifestyle choices may mean that many boomers continue to work part-time. A working paper from the Bureau of Labor Statistics using data from the University of Michigan's Health and Retirement Study found that half to two thirds of respondents with full-time careers take on "bridge" jobs before exiting the labor force and that more individuals are choosing to work part-time after leaving full-time career employment.

Several temporary staffing firms may stand to benefit from these workforce trends. Robert Half International RHI is one of our favorite professional staffing firms. It is the leader in specialty staffing, and benefits from topnotch management. Its gross margins are among the highest in the staffing industry, a reflection of its focus on highly skilled temporary workers. It boasts average returns on invested capital of 18% over the last 13 years. Other temporary staffing firms that may also benefit include Manpower MAN and Adecco ADO . Adecco is the worldwide leader in temporary staffing, with Manpower not too far behind. These two firms have a strong network and the ability to attract workers with their solid brand names. They may also benefit from similar demographic trends in Europe and other countries as individuals may supplement benefits with part-time temporary work.

Now is not the time to be buying these stocks. All of the companies listed have Morningstar ratings of 3 stars, but because these companies are cyclical, the ratings can change dramatically. Typically these stocks decline during recessions, when the employment picture is poor. Following the end of the 2001 recession, the unemployment rate peaked 19 months later. Likewise, most of the above stocks hit bottom in 2003, as unemployment peaked, and have all at least doubled in value since then. We think these rough periods provide good buying opportunities and would seek to pick up any of these names when they return to 5-star territory.