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Morningstar | Robert Half’s Solid 4Q Contrasts With Market Pessimism

Narrow-moat-rated Robert Half had a solid fourth quarter that exceeded our near-term expectations for the company. Even so, we plan to materially change our $69 fair value estimate. Revenue for full-year 2018 came in at $5.8 billion against our expectations of $5.7 billion, up 11% year over year, while diluted EPS rose to $3.57 from $2.33 in 2017, against our expectations of $3.50 for 2018. The stock reacted negatively to the firm’s fourth quarter, likely over fears of a slowing international market. Robert Half’s competitor, Manpower Group, relayed several months ago that political uncertainties in Europe have caused employers to rethink short-term hiring plans.

Even so, CEO Harold Messmer commented that the U.S. labor market specifically remains very strong given significant talent shortages across multiple professional discipline. We agree with Messmer’s assessment regarding the tight labor market in the United States as well as the general decline in skilled labor. While some of its competitors may struggle, Robert Half has a relatively higher proportion of its business exposed to permanent placing which benefits the firm. Furthermore, Robert Half has a reputation for filling open positions from the large network of professionals it can readily tap into. One insight we’ve mentioned in the past is that we consider the firm’s proprietary matching technology a valuable intangible asset, which we believe is a differentiator with Robert Half’s client experience.

On the temporary and consulting side of the ledger, the firm saw an impressive 100 basis point expansion of its gross margin to 38% from 37% during the prior-year fourth quarter. According to management, expanding bill/pay spreads (the most important metric to watch in temporary recruiting) and higher temp-to-hire conversion fees greatly contributed to this increase. The firm’s bill rates were up 5.2% year over year (what Robert Half bills its clients) compared with 4.9% during the prior quarter. This compares with the levels seen during the four years in the lead-up to the financial crisis, which might suggest we are approaching the cycle peak.

Turning to the firm’s segments, fourth-quarter growth was broad based, led by RH Technology growing 11.4% year over year, permanent placement staffing rising 16.4%, and Protiviti (Arthur Anderson’s former consulting arm) rising a resounding 17.6% and 45.1% year over year in the U.S. and International, respectively. Finance, technology, and cybersecurity, among other industries, drove Protiviti, and results demonstrate the efficacy of the unit’s go-to-market strategy.