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Morningstar | No-Moat Manpower Posts Strong 2Q Results; Maintaining FVE

No-moat ManpowerGroup reported results broadly in line with our expectations. Total revenues rose to nearly $5.7 billion during the second quarter, up 9.3% year over year and 4.5% on a constant-currency basis. Operating margins, however, fell 10 basis points year-over-year to 3.7%, or 4.0% excluding restructuring costs. Net earnings rose to just over $143 million, up 22.6% year over year and 17.4% on a constant-currency basis. For the first half of 2018, net earnings per diluted share stand at $3.62 against our expectations of $7.82 for the year. At a 4-star rating and a fair value estimate of $112, which we are maintaining, shares look attractive to us from a risk-reward standpoint against a market price of $86.50.

Management highlighted the fact that growth was slower than expected at the commencement of the second quarter. Lower revenue growth was primarily attributable to the firm’s business in Europe, and particularly in France. Revenue from France amounted to 62% of Manpower’s Southern Europe segment, and further amounted to a 6-point decrease in year-over-year growth from the first quarter. Management pointed to the Purchasing Managers Index, which measures the activity level of purchasing managers in the manufacturing sector. From our external reading in Trading Economics, it appears that PMI levels came in at their lower reading in terms of pace of expansion in the manufacturing sector since February 2017. Furthermore, business growth was the slowest for just under two years, and output rose the least since November 2016. Even so, management was optimistic, pointing to a French National Bank report seeing a pickup in the country toward the end of the year. We also suspect some of this lull relates to a holiday impact in the country.

Even with softer-than-expected revenue growth in countries like France, management called out strong revenue trends in the United Kingdom (which constitutes 30% of the Northern Europe segment) and throughout other parts of Asia-Pacific, the latter which rose a resounding 21% in revenue year over year, and more importantly, constitutes about 47% of Asia-Pacific’s revenue. From our understanding, this was due to double-digit growth across several markets, notably China and India. We find it encouraging that the firm is pointing to these higher-growing markets, including Latin America, for an increasing contribution and potential acceleration of revenue. While these markets don’t make up a significant portion of revenue, they do comprise almost 40% of the company’s volumes, and represent a potential route of increased monetization for the firm.