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Morningstar | Manpower Reports a Mixed 2Q as Europe Continues To Be a Challenge; Maintaining Our $87 FVE. See Updated Analyst Note from 19 Jul 2019

Manpower reported mixed second-quarter earnings as certain markets in Europe continue to experience a slowdown in economic activity. Manpower beat EPS estimates but was at the lower end of sales estimates. We're maintaining our fair value estimate of $87 as our revenue and operating margin assumptions are unchanged. Reported sales decreased 5% (flat on a constant currency basis) year over year to $5.4 billion from $5.7 billion, which came in near the bottom of management’s guidance of 3% to 5% decrease in revenue for the quarter. Operating margins decreased 130 basis points to 2.4% from 3.7% year over year. Operating margins were constrained by the $60 million goodwill impairment charge Manpower recognized in the quarter due to its investments in Germany. In Germany, changes to temporary staffing contract lengths and rising wage requirements proved to be challenging.

Manpower’s main business lines, Manpower (63% of gross profit) and Experis (20% of gross profit) faced a challenging quarter as gross profit was down 5% and 6%, respectively. Economic weakness in the eurozone area will continue to be a headwind as Manpower is heavily exposed to Europe. The eurozone area accounts for approximately 67% of consolidated revenue. Within the Manpower business line, about 60% of placements are in the light industrial space and approximately 40% are in office and clerical roles. Manpower’s exposure to lower-margin placements will pressure operating margins in the near term. However, we still maintain that Manpower will continue shifting to higher-margin human resource solutions and outplacement services over the long run. Manpower’s solutions and services business will benefit its multinational clients looking to outsource recruiting activities.

Northern Europe was Manpower’s hardest hit region as top-line revenue was down 15% year over year. The region’s weakness was mainly due to slower revenue in Germany (down 30%) and in the Netherlands (down 26%). In addition to the regulatory hurdles mentioned earlier, Germany has experienced a slowdown in manufacturing activity. The economic slowdown in Europe was offset by revenue increases in the Americas region mainly led by Mexico and Canada with the U.S. slightly down. Further, we expect low unemployment rates in the U.S. to slightly offset Manpower’s European operations. Manpower will benefit from the IT labor shortage in the U.S., as skilled IT workers are in short supply.

Finally, Manpower expects slightly better results in the third quarter compared with the second quarter. The firm expects revenue growth to be flat to down 2%. Notably, management expects the Americas and Southern Europe regions to be up by low single digits, with Northern Europe down by midsingle digits. We think Manpower will pick up some momentum in the second half of the year as clients in Europe look to increase outsourced recruiting.