Robert Half and the recruiters – hired or fired?
(RHI, $6.9bn market cap, $88m ADVT, 97% free float)
Podcast episode. Many thanks to Jeremy McKeown for hosting me on his In The Company of Mavericks podcast. I greatly enjoyed our conversation, which covered Sweet Stocks, investing philosophy, 4imprint, YouGov, Loungers and running backyard ultras. It is available on Spotify, Apple or Transistor.fm.
Programming note. As I mention in the podcast, I will be aiming to run continuously for 300 miles (or more) over 72 hours (or longer) in the Backyard Ultra world team championships race starting on October 19. As such, output may be intermittent until normal service resumes towards the end of the month.
Robert Half (RHI) is a $7bn US staffing company with a finance and accounting focus. Since its 1987 IPO, it has enjoyed decent growth through numerous cycles.
I consider Robert Half to be the best among a group of midcap recruiters and staffing companies. They all share attractive characteristics of low capital intensity and high cash generation. But fierce cyclicality and intense competition are facts of life that prevent the stocks from being seen as top quality buy-and-hold propositions.
Accordingly, investors have often treated the recruiters as a trading game, trying to buy near the bottom for a quick gain as the cycle turns. But it was at least a positive-sum game: the names delivered profitable growth, and rising distributions, over time and from cycle to cycle.
More recently, the quality of these businesses has been called into question. Results have been poor. Might something have changed structurally to undermine the traditional recruiter model?
LinkedIn and Indeed have rocketed to c.$15bn of combined recruitment-related revenue. Has that come at the expense of the recruiters?
This post is in two parts. In the main body of the post, I profile Robert Half in detail. Then in the annex, I zoom out and compare the track records of the scaled peers.
I conclude that structural worries about the industry might have some validity. While a trade would still be available to express cyclical optimism, I have no firm macro conviction. As such, I own no recruiters for the time being.
Feedback is welcome. Can RHI or other recruiters be underwritten as quality growth stocks? Or are they just to be traded on high free cash flow yields and hoped-for cyclical upswings?
Robert Half International
In 1948, the accountant Bob Half and his wife Maxine founded their staffing business, specialised in the placement of financial personnel.
In 1986, Max Messmer purchased the business from Half. This paved the way for the repurchase of the various Robert Half franchises, the creation of a centralised group, and the IPO in 1987.
Overall growth has been strong through numerous cycles. Specifically, my first chart below shows an impressive 10.2% compound revenue growth rate from 1993 to the most recent twelve months to June 2024.
However, if we decompose the growth rate by cycle, we can see a clear slowing. My next chart, measuring from trough to trough, shows that the breakneck >20% growth of the 1990s slowed to 6.3% in the 2000s, and again to 5.1% in the most recent 14 years or so.
Likewise, the stock has added value against the S&P over the whole of this century, but the outperformance came earlier in the period, and the last five to ten years have been more disappointing.
Management
Max Messmer, 78, is Executive Chairman of RHI. He led the MBO of the company from Bob Half in 1986, and served as Chairman, President and CEO for the next 34 years. In 2019 he transitioned to Executive Chairman, passing the President and CEO titles to Keith Waddell. Messmer owned 0.6% of the company at the most recent proxy, down from 4.1% in 2005.
Waddell himself has been at RHI since 1986, prior to IPO. He served as CFO from 1988 to 2019, before taking over as CEO. He is 67. He owned 1.3% of the company at the most recent proxy, worth c.$90m.
Two other top executives are also tenured from the 1980s, namely Paul Gentzkow, President and CEO of Talent Solutions, and Robert Glass, EVP for Corporate Development, who joined in 1986. Gentzkow, Glass and the nine other executives and directors owned 1% of the company between them.
The continuity of leadership provided by these men over nearly forty years is exceptional.
Business description
Recruiting is at heart an incredibly simple outbound sales business. Companies need great talent and workers need jobs. An energetic, personable and persistent recruiter will be able to sniff out the leads and persuade the hiring companies to pay to take their candidates.
The recruiter role is high-pressured, with quotas for daily phone calls and client visits and weekly billing hours. A thick skin is required. As a former VP at Robert Half Technology put it on a Tegus call, “you've got to have some mix of persistence and aggression on the front end to reach out to people”.
Churn is inevitably high. Out of a hundred new hires, twenty might be naturals, forty might not have what it takes, and forty in the middle might become productive with the right training and support.
As the top recruiter in its category, RHI has some advantages, namely its brand name recognition and longstanding reputation, its vast candidate database, and its ability to cross-sell different lines of business into its clients. RHI may also have superior technology, greater market intelligence, and an ability to offer more complex managed solutions (teams of contractors to handle a specific project based on a Statement of Work).
(Since at least 2015, RHI has claimed to use artificial intelligence and data analytics to match CVs to suitable vacancies and such like. How this may translate into any new opportunities or threats for RHI in the era of more powerful AI tools is as yet unclear.)
By segment, temporary staffing (or ‘contract talent solutions’) is the biggest profit contributor, at 53% of EBITA in 2023. Permanent placements accounted for 14%, and the Protiviti business contributed 34% of EBITA. See chart below.
Staffing
The staffing businesses operate from 315 office locations in 18 countries. The US is 76% of the total, followed by Germany (6%), Belgium (4%), Canada (4%) and a tail of small countries.
By line of business, the contract talent solutions business splits 65% finance and accounting, 19% administration and customer support, and 16% technology. (RHI also has small practices in marketing & creative and in legal. These are not split out but included in the 65% finance number.)
Historically, the business skewed towards junior staff such as bookkeepers, who might be billed out at as low as $25 per hour and paid at $15/hr. Over time, RHI has shifted its focus to higher-skilled talent, such as financial controllers at $120/hr, which are more profitable. As longer-lasting assignments they are less economically sensitive. The mix of revenues from higher-skilled positions is now over 50%, from below 30% during the dot-com downturn.
The corollary of this move up the skill ladder is a reduction in volumes. The chart below shows the annual number of placements as disclosed in the 10K each year, together with my calculation of average revenue per placement. The uplift in pricing is admirable, but the steep fall-off in volumes is perhaps rather alarming.
Two former RHI employees gave interviews to Third Bridge in 2023. One spoke glowingly about the company while the other was very negative. (This shows the limitations of drawing firm conclusions from n=1 expert transcripts.) Both agreed, however, that RHI is aggressive in its premium price positioning.
“Robert Half is the pricing monster, if you will. There's rarely an occasion that our competitors are going to be as high-priced as Robert Half. In fact, our customers will refer to that and say, "You guys are too high-priced." For obvious reasons, we're publicly traded, we're a huge company so our overhead is a lot more than our competitors' overheads and so obviously our pricing if we're maintaining a certain margin, that pricing has to be at a certain level to attain that margin. […] Countless times, my price was higher than my competitor, but the client took my consultant because of the quality of the product that I presented them.” (Third Bridge, Nov’23)
“Robert Half has always had the stance that they’re not going to compress margins and I really think that’s led to the decline in business and the decline in a lot of turnover of business and a deteriorating factor of growth, because other firms will undercut Robert Half today and I don’t think Robert Half is willing to move the needle too much on that front, so they have that attitude of, “They’ll come back to us.” Robert Half is always in this hamster wheel of trying to find new clients that will pay that premium pricing, but then, once the client has premium, realises there are other clients and markets, they’re just going to weed Robert Half out. Robert Half has got to figure out a way to have a model that’s more cost-effective, else the bucket of business they can go after is going to continually shrink year after year.” (Third Bridge, Jul’23)
Client base
RHI’s client base skews towards SMEs and the middle market, across all sectors.
“When you're dealing with middle-market companies, our end market is virtually every business in America, from Fred's Tires to Acme Manufacturing” (Keith Waddell, Jan’18).
The flip side of this is that RHI is underweight the largest corporates, including the tech giants. They mainly source professional talent in-house, or possibly use a managed service provider on a far thinner margin than RHI wants.
As every fund manager knows, being underweight the biggest US companies has been painful in recent years. This may help to explain RHI’s volume and revenue weakness.
Protiviti
Protiviti is a consulting business that RHI established in 2002 by hiring more than 700 former Arthur Andersen professionals, including over fifty former partners. This was a brilliant opportunistic move in the wake of the Enron collapse, which brought down Arthur Andersen with it. Internal audit, regulatory risk and compliance, business process improvement and technology consulting are the key practice areas. 40% of revenue is from the financial services industry.
Protiviti has a unique positioning, in that it offers Big 4 capabilities without the conflicts of interest that arise from external audit engagements. This leads to referrals from the Big 4 themselves. (EY proposed to split its consulting unit in 2022, but cancelled the plan in 2023 – good news for RHI to preserve the favourable status quo.)
Protiviti’s profit profile is shown below. In 2021-22 it won a lot of work administering stimulus programs for state and federal government clients, such as unemployment and housing assistance. While those specific programs have now ended, the new relationships have led to further public sector mandates, explaining why Protiviti has remained on a strong growth path compared to pre-COVID.
Another recent growth driver has been ‘blended solutions’, which means Protiviti using temp staff from RHI’s contract talent solutions business to resource consulting projects. The value of these blended solutions has been reported since 2018 via an intersegment eliminations line. As the chart below shows, this has grown rapidly.
As for Protiviti’s margin profile, it lost $42m in 2009 and 2010, acting as a drag on the group. Presumably the high financial services exposure was particularly difficult during the financial crisis.
However, more recently Protiviti has fared far better than the staffing businesses in the current downturn, as my chart below shows.
The current downturn
Q2’24 was the eighth consecutive quarter of sequential decline, and RHI has guided for Q3’24 (due to be announced in a fortnight) to be down again. The longest period of down quarters on record was ten, way back in the dot-com period.
It’s remarkable that RHI (and other staffing companies) are getting crushed like this when the US economy is not formally in recession. Client and candidate caution are to blame. As Waddell elaborated last October:
“Clients are budget sensitive and very selective in their hiring activities, including the approval of new projects. Also, many are maintaining their internal head counts based on the anticipated difficulty in finding suitable replacements. Many times, this is funded with a reduction in their contract staff. In addition, job candidates are more reluctant to make career moves, fearing they may become the last in and first out in their new roles. The net result is less churn in the labor market.”
As the quote suggests, there was a hangover from the over-hiring that took place in 2021-22 post Covid. Firms have been hoarding those staff, and instead cutting contract staff.
RHI does not have good visibility on the timing of the cycle turn. In January 2024, the CEO spoke with optimism about “approaching a positive inflection point”. And in April 2024 he endorsed a “spring-loaded rebound” scenario which has yet to play out. Q2 2024 then inflected negatively again.
The sellside analysts have been equally surprised by the depth of the current down cycle. The chart below shows the cumulative >60% cuts made by consensus to the 2024 EPS estimate since it was first struck.
Financial profile
I asserted earlier that recruiter models are highly cash generative. This chart provides the evidence. RHI’s free cash flow averaged $500m across each of the last six years, which included both strong and weak years for the economy. RHI paid out 90% of the cash on consistent buybacks and a growing dividend, while also lifting its cash pile from $295m at Dec’17 to $732m at Dec’23. (RHI has no debt.)
ROIC is consistently high given the low capital employed, although there is no available reinvestment opportunity.
RHI has reduced its share count at a 2.7% CAGR, amounting to a 40% drop over the last twenty years. Together with the 5.1% trough-to-trough earnings growth, that adds up to a c.8% EPS growth potential through the cycle. Throw in a 3% dividend yield and you might expect a c.11% long-term total return, absent any change in rating. In reality, both earnings and the multiple are highly volatile in the short to medium term, hence the reputation as a trading stock.
RHI estimates and valuation
Despite the longer and deeper than expected downturn, consensus still expects a nice bounce-back in 2025E and 2026E. I have no position in RHI and no strong view, so my estimate table below reflects consensus numbers for illustrative purposes.
The stock would evidently be a bargain if these numbers come to pass, especially given the highly cash generative model and the high shareholder payout ratio. 13.1x P/E would imply a free cash flow yield and payout yield both over 7%.
The risks are twofold. The economy may get worse and move into an actual recession (which the US has not yet seen, despite RHI’s downturn). Alternatively, RHI’s business may simply not bounce back as expected, if it turns out that possible structural headwinds (mentioned above and expanded upon below in the annex) are starting to bite.
It is a cliché that you should buy cyclicals at high multiples and sell them at low multiples. RHI’s P/E multiple history, below, is a beautiful illustration of the truth of the adage. Buying the stock at any time during calendar 2009, when the forward multiple topped out at over 100x, worked out well.
Applying that logic to today, it is reassuring that the multiple is at the top of its recent range, but it may yet have scope to go higher, if earnings disappoint even more than before.
Annex: the peer group
Robert Half is the largest, after Randstad, of a couple of dozen of midcap and smallcap recruiters that I follow globally. My table below showcases selected US and European names. (The Japanese recruiters and staffing companies operate to a very different cycle and market dynamics.)
The magnitude of Robert Half’s drawdown is concerning in this context. It has reported a far bigger drop in gross profit from recent peak, at -24%, than all these peers.
The table shows that every US and European recruiter stock in my group, bar Korn Ferry with its large non-recruiting business, has lagged behind the S&P over the last ten years. By contrast, the Japanese names have been far stronger, even allowing for yen weakness: see chart below.
Meanwhile, the giants Recruit and Microsoft have trounced the group. Both have taken a huge slice of the global recruitment profit pool from nothing, as shown in my graph below.
Some of the LinkedIn and Indeed revenue may have been taken from legacy media. (Were newspaper job ad sales substantial as recently as 2015?) However, in my view it is also likely that these tools have impacted the recruiters in my group negatively, in two ways.
First, both LinkedIn and Indeed act as a tax on the traditional recruiters, who must pay for both tools in order to source candidates and find leads effectively. Data on the cost of LinkedIn Recruiter is not freely available, but for Lite and Regular respectively it may cost between $1,500 and $5,000 per seat. All recruiters use these sites alongside their direct candidate sourcing capabilities. (RHI says that over 50% of its candidates are sourced directly.)
Second, and perhaps more importantly, these tech tools have empowered the larger and/or more confident employers to cut down on agencies and rely more on internal hiring teams. (Unlike property portals such as Rightmove, which do business only with agencies, Indeed and LinkedIn are more than happy to cut out the middle men and take money directly from employers.)
As Randstad said back in 2019:
“[T]he biggest competitor is our client. […] [T]he real big, big animals with great employer brands, why outsource? That's the biggest threat for us.” Randstad conf call Dec 2019
Good data on the split between internal hiring versus the use of recruitment agencies is hard to come by. But I find it plausible that a long-term lack of real progress by the listed recruitment firms is linked to a rise in the rate of in-house hiring.
Some examples of long-term stagnation are shown below. Hays has not yet surpassed the FY08 peak operating profit.
Pagegroup and SThree did achieve higher recent peaks, but the long-term profit CAGR is de minimis or negative after adjusting for inflation.
By contrast, and repeated again below for convenience, RHI did deliver real profit growth from FY07 peak to FY22 peak. However, this was entirely thanks to Protiviti’s excellent performance rather than the recruitment business, which has been similarly flat to the UK peers in real terms.
Another great read. I have always thought that Linkedin would disrupt the core recruitment market.
Great post. Any reason why you haven't mentioned Amadeus Fire as a competitor ?