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Morningstar | Solid 3Q Results and Updated Guidance Prompt Us to Raise Robert Half's FVE. See Updated Analyst Note from 23 Oct 2018

Narrow-moat-rated Robert Half turned in a solid third-quarter effort. The stock rose on news of some modest increases to guidance, which prompted us to relook at some of our near-term assumptions. While our long-term outlook is unchanged, we did raise our fair value estimate to $69 from $65. The increase is partially due to the time value of money, and partially due to recent outperformance in the stock’s fundamentals, which have outpaced our assumptions. We continue to view Robert Half as a high-quality staffer given its brand recognition, in part helped by its greater mix of permanent staffing placements compared with other staffers in our coverage, like no-moat Manpower Group.

One number that really stood out to us, and we think the market failed to appreciate, was the accelerating bill rate. Last quarter, this number rose 3.7% year over year, which itself was an increase of 250 basis points from the first quarter. This quarter's figure rose by a resounding 4.9% year over year, near precrisis levels of 5% to 6%, which the firm maintained for the five years immediately preceding the crisis. We continue to see this number as at least partial evidence of pricing power and the strength of its recruiting technology (along with some cyclical tailwind benefits). On the call, management pointed out that it has been seeing high wage inflation across its lines of businesses. Even so, high wage inflation is being passed on to the firm’s customers.

Interestingly, management expects the bill rate to rise to the low 5% range heading into the 2018 fourth quarter. Other additional insights on the call included concerns over a potential holiday seasonal slowdown, but we see this as temporary as permanent placing in December is inherently lumpy. Most employers won’t look to hire candidates seeking permanent employment until the start of the year. Management is being cautious that gross margins don’t expand too far, too fast from current levels (41.6% total, including 99.8% in permanent staffing). That said, it expects that Robert Half can continue to pass on some wage increases as the labor supply tightens.

Finally, this quarter was also a net positive for Robert Half Technology. The year-over-year comparisons set a somewhat low bar, but the sequential comps were not. Even so, the firm grew this segment 4% sequentially. Tailwinds in this business included higher small business confidence, as well as higher tech budgets.