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Morningstar | Robert Half Reports 2Q Earnings In Line With Expectations, We Maintain Our $56 FVE

Narrow-moat-rated Robert Half reported second-quarter earnings in line with our expectations. Robert Half is fairly valued at current levels. We’d prefer to see a pull-back in shares before recommending the stock. Robert Half continues to benefit from tight labor markets, especially in the United States. Reported sales increased 4% year over year, to $1.5 billion, from $1.4 billion. Total staffing revenue (excluding Protiviti) grew by 2% year over year, on the back of tough comparisons. Protiviti experienced robust growth of 17%, which was broad-based across IT audit, IT infrastructure and cyber-related projects.

We see no signs of the U.S. economy letting up in terms of employment growth. Strong economic growth in the U.S. favors Robert Half, as roughly three fourths of its revenue is U.S.-based. Furthermore, Robert Half reported a solid 5.4% year-over-year increase in bill rates, compared with a 5.7% rise last quarter. We are encouraged by this quarter’s bill rate growth despite the fact it decreased slightly from the first quarter. We expect bill rates to average roughly 5% in the current economic environment.

Further, operating margins in all segments continue to hold up as employment growth in professional end markets remains firm. Robert Half reported operating margins of 9.5%, 18%, and 10.6% in the temporary, permanent, and Protiviti segments, respectively. Additionally, we expect consolidated margins to average in the low-double-digit range over the next few years. The Bureau of Labor Statistics expects job placements in accounting, finance, and IT roles will grow faster than the national average, and we like Robert Half’s exposure to higher-margin placements compared with its competitors.

Finally, in terms of guidance, Robert Half expects third-quarter results to be roughly in line with second-quarter results. Management anticipates revenue of $1.525 billion-$1.590 billion, with EPS of $0.98-$1.04. Thus far, the firm has met our 2019 revenue and EPS expectations, and our outlook for the remainder of the year is unchanged. Our growth assumptions are underpinned by the expectation that tight labor markets will persist as job openings will outpace hires, and Robert Half will continue to charge premiums for its job placement services in temporary and permanent placements.