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Amid rising inflation and a tight labor market, employers are struggling with how much to raise employee pay in 2022. Corporations are generating record profits and workers are being pressed to keep up with rising costs for basics including food, gas, healthcare, transportation and housing. Compensation surveys of employers show that pay raises for 2022 will increase more than the low 3% range seen in recent years, but not as much as the current level of headline inflation in the U.S. economy, which reached 6.8% in late 2021. However, for the first time in several decades, “inflation is an important factor in deciding annual raises,” said Gad Levanon, chief economist at the Conference Board. Among the firms that say they plan to increase pay budgets in one survey, the average increase is currently up to 5.2% for half of the firms, with 25% say they are planning to give pay increases greater than 6%.
In a tight and tense labor market, workers are unionizing to an extent not seen in recent decades and millions of workers are quitting jobs: 4.2 million workers quit their jobs in October, a number that came down slightly from the previous month but left the total number of job openings at 11 million. Quit rates have remained at a 20-year high, and employee expectations are at an all-time high.
One bright spot for employment services stocks is the plethora of companies turning to technology for simulation training rather than traditional video call coaching, which can be expensive. In the past, replicating classroom learning via a video call provided the necessary information but not the experience to enable employees to apply skills to real-life scenarios as a simulation does.
Overall, the primary concerns looking into 2022 are a possible wage-price spiral—with higher labor market costs feeding into higher inflation across the board—and the poor numbers from the December 2021 job report causing the Fed to want to slow the economy down. However, implementation of new technology to capitalize on new market segments could be advantageous for these three employment services stocks. Additionally, as the coronavirus pandemic recedes, these firms and their technology should become even more important to companies across the U.S.
Grading Employment Services Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three employment services stocks—Korn Ferry, Insperity and Robert Half—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Employment Services Stocks
American Association of Individual Investors
What the A+ Stock Grades Reveal
Korn Ferry
KFY
is a U.S.-based firm engaged in organizational consulting and management recruitment to help clients fill mid- to high-level management positions. Much of its revenue comes from providing consulting services related to organizational structure. Its segments include executive search, Hay Group and Futurestep. The executive search segment provides executive-level talent sourcing, in addition to research-based interviewing and onboarding solutions for clients predominantly in the consumer, financial services, industrial, life sciences/healthcare and technology industries. The Hay Group segment assists clients with ongoing assessment, compensation and development of their senior executives and management teams. The Futurestep segment provides talent acquisition solutions and services, such as project recruitment and individual professional search. The company has operations in North America, Asia-Pacific, Latin America and other regions.
Korn Ferry has a Value Grade of B, based on its Value Score of 34, which is considered in the range of value. The company’s Value Score ranking is based on several traditional valuation metrics. KFY has a score of 36 for the price-to-sales ratio, 34 for shareholder yield and 42 for the price-earnings ratio (remember, the lower the score the better for value). Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the enterprise-value-to-Ebitda, price-to-free-cash-flow and price-to-book ratios. Korn Ferry has average Growth and Momentum Grades of B and has a current dividend yield of 0.7%.
Insperity
NSP
primarily provides a wide range of human resources and business solutions that help companies improve their performance. Small- and mid-sized enterprises are the company’s primary target customers. Most of the Insperity’s products are offered through the company’s workforce optimization and workforce synchronization solutions, comprising various human resource functions, such as payroll and employment administration, employee benefits and compensation, government compliance, performance management, training and development services and human capital management. The company generates all its revenue in the U.S.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Insperity has a Quality Grade of B with a score of 67. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its return on assets and gross income to assets, ranking in the 86th and 85th percentile of all U.S.-listed stocks, respectively. However, it ranks poorly in terms of its change in total liabilities to assets, which is in the 31st percentile.
Earnings estimate revisions offer an indication of how analysts are viewing the short-term prospects of a firm. The company has an Earnings Estimate Revisions Grade of B, which is considered positive. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Insperity reported a positive earnings surprise last quarter of 4.0% and in the prior quarter reported a positive earnings surprise of 37.0%. Over the last month, the consensus earnings estimate for full-year 2021 has increased to $4.368 per share based on three upward and two downward revisions.
Insperity has a Momentum Grade of B based on its Momentum Score of 62, and a strong Growth Grade of B. The company has a current dividend yield of 1.6%.
Robert Half International
RHI
provides specialized staffing and risk consulting services. The company provides these services through its divisions, including Robert Half Finance & Accounting, OfficeTeam, Robert Half Technology, Robert Half Management Resources, Robert Half Legal, the Creative Group and Protiviti. The company’s segments include temporary and consultant staffing, permanent placement staffing and risk consulting and internal audit services. The temporary and consultant staffing segment provides specialized staffing in the accounting and finance, administrative and office, information technology, legal, advertising, marketing and web design fields. The permanent placement staffing segment provides full-time personnel in the accounting, finance, administrative and office and information technology fields. The risk consulting and internal audit services segment provides business and technology risk consulting and internal audit services. The firm generates annual revenue of over $5 billion and earnings before interest and taxes (Ebit) of over $400 million. Robert Half also has nearly 19,000 employees.
Robert Half has an A+ Growth Grade of B. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow. The company reported third-quarter 2021 revenues of $1.7 billion, up nearly 44% from $1.2 billion in the year-ago quarter. The company reported quarterly diluted earnings per share of $1.53, growing 129% from $0.668 per share year over year. The company reported a non-GAAP operating income of $228 million, up 123% compared to the prior-year quarter.
Robert Half has a Momentum Grade of A, based on its Momentum Score of 85. This means that it ranks in the top 15% of all stocks in terms of its weighted relative strength over the last four quarters. The company has an average Value Grade of C and a Quality Grade of A, based on respective scores of 58 and 92. Robert Half has a current dividend yield of 1.4%.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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