Over the last several years, one of the biggest benchmarks the Fed has used to evaluate the need to raise, lower or maintain their interest rate policy has been the employment rate. Every month, the market seems to hold its breath as a new set of unemployment and salary data is made available and everybody gets to wonder what the information means for the current economic climate and, therefore, for interest rates. Even as the media and market at large has focused more and more on the spread and fear of coronavirus over the last week, interest rate policy has managed to find a way into the conversation. Will coronavirus blunt the economy enough to prompt the Fed to lower rates? Some analysts seem to think so.
We’re moving into the eleventh year of an economic expansion that is unprecedented in recorded U.S. history. That generally means that U.S. business is healthy, profitable, and growing – even amid broader concerns tied to extended tariffs that have held things back, and even amid indications that the virus will have a measurable economic global impact. That usually also implies that if you’re looking for work, or possibly a new, better opportunity, they aren’t too hard to find. That also means that businesses that offer services that can help match job talent with workforce needs, on either a temporary or long-term basis, often do well. And that’s where today’s stock comes into play. ManpowerGroup Inc. (MAN) is one of the largest providers of workforce solutions and services, with operations that span the globe. Most economic forecasts, including those coming from the Fed, seem to indicate that employment growth should remain strong, with demand high in particular for talent in highly skilled technical and professional occupations. That supports the idea that demand for staffing services such as those provided by MAN should remain healthy.
There are some risks; outside the U.S., economic growth is slowing, and in Europe, which is where MAN derives more than 2/3 of its revenue, those numbers look like they could be turning negative. Brexit, trade, and now of course the addition of coronavirus-fueled fears have certainly had their impact on the entire European Union. Economic downturns tend to be strongly negative for a company like MAN, and so this could be a significant headwind looking ahead. That said, MAN is also a stock with an excellent fundamental profile by most measurements, and a value proposition that is pretty interesting and has gotten far more so in the last month. Should you consider taking a position right now? Let’s take a look.
Fundamental and Value Profile
ManpowerGroup Inc. is a provider of workforce solutions and services. The Company’s segments include Americas, Southern Europe, Northern Europe, Asia Pacific Middle East (APME), Right Management and Corporate. The Company’s Americas segment includes operations in the United States and Other Americas. Its Southern Europe segment includes operations in France, Italy and Other Southern Europe. Its Northern Europe segment includes operations in the United Kingdom, the Nordics, Germany and the Netherlands. The Company’s APME operations provide a range of workforce solutions and services offered through Manpower, Experis and ManpowerGroup Solutions, including permanent, temporary and contract recruitment, assessment and selection, training and outsourcing. The Company’s Right Management segment provides talent and career management workforce solutions. The Company provides services under its Experis brand, particularly in the areas of information technology (IT), engineering and finance. MAN’s current market cap is $4.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined more than -11% while revenues declined by about -3.6%. In the last quarter, earnings improved by nearly 12%, while sales were down -1%. MAN operates with a very narrow margin profile, with Net Income consistently running at only about 2.23% of Revenues over the last twelve-month period, and improving only slightly to 2.67% in the last quarter.
Free Cash Flow: MAN’s free cash flow is healthy, at about $761.5 million. This is a number that has improved significantly from a year ago, when Free Cash Flow was a more conservative, but growing $418 million (well above the year prior to that). This is a good sign the company’s overall profitability is improving, and translates to a very healthy Free Cash Flow yield of 17%.
Debt to Equity: MAN has a debt/equity ratio of .49. This is a conservative number that is manageable despite its increase over the last year or so from .17. The company’s balance sheet indicates that despite its narrow margin profile, it is sufficient to service its conservative level of debt, with healthy liquidity from about $1.02 billion in cash and liquid assets to provide additional flexibility against $1.3 billion in long-term debt.
Dividend: MAN pays an annual dividend of $2.18 per share, which translates to a yield of about 2.87% at the stock’s current price. This is also nicely above the $2.02 per share it paid a year ago.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at about $113 per share. That means the stock is trading at an interesting discount, with about 48% upside from the stock’s current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward trend from January to its current price; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s momentum is clearly bearish, and has accelerated aggressively in the last week as the market has dipped soundly into correction territory. The stock did move higher yesterday from its low at around $73, and appears to be trying to use that level as support. If it can maintain that level, its closest resistance level is around $79 based on pivots last seen in September of last year. If, however, $73 doesn’t hold as key support, the stock could drop quickly to about $62 based on pivots last approached in December of 2018.
Near-term Keys: If you’re looking for a short-term bullish trade, the best signal would come from a push above $79; the stock could have good upside to about $84 in that case where the 38.2% Fibonacci retracement line rests. If you want to be aggressive, and the stock continues to move higher off of $73 support, you could also use the current pivot low as a signal for an earlier bullish trade with the stock itself or with call options. If the stock reverses and moves back below $73, take it as a strong signal to consider shorting the stock or to work with put options, with an eye on an exit target in the $62 range. The value proposition is compelling at the stock’s current price; however the current state of momentum makes me hesitate to say this is a great time to buy the stock as a long-term value play. I think it would be wise to wait to see if the stock does, in fact stabilize around its current level, or build bullish momentum first.