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Morningstar | Robert Half Benefits From a Tight Labor Market Despite Market’s Pessimism in International Markets

Consistent economic growth and a historical focus on skilled white-collar placements for small and midsize employers have sustained demand for narrow-moat Robert Half International's professional staffing services. The firm is generating healthy growth and record earnings by catering to structural shifts in employment patterns: increased outsourcing, the rise in surge staffing for project-based work, and greater flexibility to fill immediate needs with temporary staff, all while assessing longer-term hiring needs.RHI's temporary staffing segment, which includes temporary and project-based staff, contributed 75% of revenue and 69% of EBIT in 2018. The temporary placement portion of this unit is more commodified and generates lower average operating margins. For the overall segment, EBIT margins over the past decade fluctuated between 2% and 11% trough to peak, averaging 8.3%. While job supply and demand largely dictate the key bill/pay rate spread, we think RHI leverages its niche sourcing expertise to capture a greater portion of higher-margin skilled temp placements in the longer term.The permanent staffing segment has historically been more cyclical than the temp segment. Perm's revenue share ranged from less than 5% to above 10% from trough to peak (averaging 8%), while its EBIT share ranged from negative 10% to 22% (14% average). Perm benefits from high operating leverage during economic upturns. As the firm becomes more efficient at matching placements in high-skill niches, we expect a richer sales mix and higher overall operating margins.The Protiviti in-house consulting arm (just over 16% of revenue and nearly 16% of EBIT in 2018) has blossomed, with rising customer demand and a lower-cost operating model. 2018 growth of 17% marked a return to 15%-plus growth from 2013 to 2015. Healthy operating margins of 10% in 2018 compare with a Sarbanes-Oxley-boosted peak of 15% in second-half 2015. To gain flexibility and control costs, Protiviti strategically staffs many projects from its own candidate network. Fresh demand from IT testing, cybersecurity, and new accounting/compliance regulations bolsters its traditional risk consulting and internal audit menu.