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Morningstar | Robert Half Posts a Solid 2Q; Raising FVE to $65 per Share. See Updated Analyst Note from 25 Jul 2018

Narrow-moat-rated Robert Half had a good second quarter, and the firm is progressing slightly ahead of our 2018 expectations. We are raising our fair value estimate to $65 per share from $62 to account for a cyclical inflection, as well as incorporating the firm’s latest broad-based, strong results into our model. Revenue rose by 11.4% year over year to $1.46 billion, including 10% on a same-day, constant-currency basis. Net income per share in the second quarter was $0.89, up 39% year over year.

Gross margin in temporary staffing amounted to 37.5% of revenue, up by 10 basis points versus the year-ago period. Higher temp-to-hire conversion fees, which are paid by companies that hire temporary worker placed by Half, and higher bill-pay spreads--the spread between what employers pay Half for staffers and Half pays each staffer--helped offset higher fringe benefit costs. Bill-pay spreads tend to narrow during tight labor markets. Intuitively, this makes sense, since during economic recessions workers are generally willing to accept work for lower pay. Even so, Half has defied the odds and has continued to expand these spreads recently, even as unemployment dropped to 4.0%, near levels not seen since 2000. Additionally, Half’s bread-and-butter focus for finance and accounting workers is particularly tight (one Robert Half representative claims this figure is as low as 1.2%).

We attribute the expanding spreads to the strength of the firm’s reputation and moat, and in particular, its intangible asset moat source. As proof, we point to above-inflation bill rate increases of 3.7% year over year, which is up about 250 basis points from last quarter. We also think this confirms our thesis that Half uses its niche sourcing expertise to capture a greater portion of higher-margin skilled temp placements in the longer term. A recent interview from Paul McDonald, a senior executive director at Half, provided us with some recent insights into some of these novel tactics employed at the firm, including offering employee referral bonuses, tapping into candidates that could “boomerang” back into a company after leaving on good terms, or offering part-time employment for candidates who’ve had major life events.

On the call, management was asked about the fast acceleration of bill rates, which virtually all came from the U.S. As management pointed out, however, from 2004 to 2008, a 3.7% year-over-year increase still falls short of the 5%-6% year-over-year increases that Half saw in the years leading up to the financial crisis. While management admits this is a business with a high amount of visibility, we interpret the underlying data as suggesting there is still some more runway for growth. Finally, we’re optimistic about the firm’s Protivi business, which grew 16.1% year over year to $234 million. We think management’s aggressive addition to internal headcount, particularly in Cyber and Cloud in Protivi, provides Robert Half with maximum flexibility in a rapidly expanding market.