Hi Paul - Here are the goods on OLS. Its about 4 pages worth.
I'm one of those kooky types that likes to buy great companies after glitches with low PSRs. I build one of these reviews for every stock I own.
Regards
Jeff
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Why I bought Olsten
12/20/95 $14.75 - Buy
1. Portfolio diversification.
2. 44% market share in US home health care. ($1.0B Revenue)
3. 3rd largest provider of temporary staffing services in US.
($1.4B Revenue)
4. Competitors are Manpower with $5.4B revenue and Kelly Services
at $2.7B.
5. Key player in two rapidly growing sectors.
6. International growth and expansion with focus in Europe and
Asia.
7. They are focused on home health care and temp staffing selling
off units that do not fit into this business model.
8. They are growing rapidly acquiring well established and
profitable companies locally and abroad.
9. Good brand recognition caused by great marketing.
10. Competent management as evidenced by 6 years of strong growth
gaining market share against competitors.
11. Well positioned to benefit from Medicare reform since home
health care is more cost effective than in-hospital or nursing
home care.
Analysis
1. Pretax profits have increased to 7.0% in 1996 averaging 4.9%
over last 5 years compared with 10.7% for entire industry.
Margin squeeze due to big contracts and sluggish growth this year
caused the Glitch. Management should be able to remedy these
problems. OLS margins are typically lower than other similar
companies because they deal in lower paying nonprofessional
workers.
2. ROE is 22%. Average over past 5 years is 17.3%. Industry
average is 21%.
3. PSR is 0.33 which is below 5 year low average of 0.36. 5 year
high average is 0.61. Industry average is 2.96.
4. 5-year average sales growth rate is 27.6% and EPS growth of
17.2%.
5. Current PE is 11. 5-year average low PE is 16.6 and average
high PE is 24.6.
6. Zack's ACE EPS growth rate is 19.3%. Based upon current
pricing and 1.2% yield and expansion to maximum PE will yield
annual return in excess of 35%.
7. Debt coverage is 33.8x.
Conclusions
1. Small margin increases will produce big gains in earnings.
2. Lots of room for PSR and PE expansion.
3. Little downside risk with current PE.
4. Debt is reasonable.
5. Good domestic and international expansion potential.
6. High customer and employee satisfaction.
7. Competent management.
8. Company lives in a continual state of transition. Expect
glitches.
Risks
1. Management has been able to expand and solve problems in the
past but there is a risk that they may be expanding too fast
through acquisitions relative to industry growth.
2. Competition from hospitals on the health care side could
restrict growth both in revenue and margins.
3. Federal legislation could cut Medicare payments for home
health care.
Literature Review
1. Value Line
- 25% insider ownership.
- Slightly higher than normal insider selling over past
year.
- Ranked 5 (lowest) for timeliness.
- Industry is consolidating and Olsten is eating a lot.
- Low margins also squeezed because of startup costs on big
contracts which should disappear after contracts are
underway.
- Company is rated A.
2. Zacks
- Zacks rank 5 (lowest)
- Average broker rating 2.8 (slightly better than neutral)
- 3 consecutive negative but small earnings surprises.
3. 3rd quarter 10Q
- Lots of nonrecurring charges integrating acquisitions.
- Revenues increased 22% for the quarter and 18% for the 9-month period. (Great for a PSR play!)
- SG&A costs decreased as a percentage of revenues. (Good
controls)
4. Preannouncement on 11/21/96
- Cited near-term challenges in both business lines. In
temp staffing because of disproportionate startup costs for
big long-term profitable contracts.
- Liguori (CEO) wants to keep customers happy by maintaining
high quality and efficiency. (Good sign)
- Expanding into higher margin areas of professional
services like accounting, legal, and IS.
5. They shifted from defense industry staffing of 50-60% revenues
in 70s-80s to 8% now. Biggest growth area is OA and DTP.
Screens and trains employees on computer skills to fill these
jobs. Pays for benefits. LI Commercial Review 1996.
6. Temp staffing industry consolidating. Small high-tech
placement firms are being bought out by bigger firms. Kelly,
Accustaff and Olsten are the big players to diversify their
service lines. Many companies don't pay benefits to temps. Lots
of M&A activity in this area. San Francisco Business Times,
6/14/96, Pg7.
7. Olsten bought out Quantum health care in a stock swap. Olsten
won exclusive contract for Cigna Health care home health services
which has 10M enrollees. Big contracts are increasingly being
negotiated on a national basis. The Quantum acquisition makes
Olsten the 3rd largest home infusion provider in the country.
Quantum was a $286M company. Arizona Business Gazette, 6/13/96,
Pg 6.
8. Great article in a home-town newspaper about how Olsten treats
its employees - very well. The story is about a woman who
started with Olsten fresh out of college 11 years ago and now
runs a branch in Wooster, Ohio. They are very accommodating of
life styles and schedules of placement workers. People work long
hours but "have fun". They feel productive. Although they have
fun, "environment is very professional with rooms for testing
training and evaluation in a peaceful setting." The company is
in constant change and they constantly adapt. She praises the
competency of the staff and the late Bill Olsten. Talks about
life being good with a real family complete with husband and
kids. Hubby is very supportive. Daily Record Wooster, 5/12/96,
Pg D1.
9. Olsten acquires another Information Technology in UK. They
now have 2,100 consultants serving US, Canada, UK and Norway
through 34 offices. Rapid revenue growth tripling in past year
to $200M. Bought other IT consulting companies in US also. They
have a total of 700 offices in N. America, S. America, and Europe
for providing IT services. Business Wire, 9/19/96
10. Olsten has over 400,000 patient accounts and 150,000 care
givers on the health care side of the business. The provide
infusion therapy, physical/occupational/speech therapies,
respiratory therapy, rehab services, pediatric and prenatal care
in-home. In January 1996 they won Aetna Health Plans bid as one
of two providers for 7M members. Reiterated CIGNA deal.
Staffing services side of business is partnering with Fortune 500
companies as exclusive provider of temp services. They had over
300 contracts in place by the end of 1995. This accounted for
30% of staffing revenue in 1995. They are going after Info
Technology market next which has higher margins. Foreign revenue
was 20% in 1995. Better Investing, 6/96, Pg 78.
11. CEO Frank Ligouri CEO and Chairman received Natl Assoc of
Temp and Staffing Services Leadership Hall of Fame Award. The
award was presented to 10 executives in past 9 years. Lots of
time given in acceptance speech about gainful employment,
dignity, family values, job security, career and corporate
loyalty. Temporary staffing accounts for 2% of US workforce. He
joined Olsten in 1971 and has been CEO since 1990. Formerly
Accountant with Coopers&Lybrand. Business Wire, 10/17/96 |
