Smart Money sizes up AccuStaff:
IT'S SO HARD finding good help these days. That's the secret behind the success of AccuStaff (ASI), one of the fastest-growing and most profitable temporary-staffing companies in the U.S. Since going public in 1994, AccuStaff's stock has soared 1200%.
With that kind of growth, you'd think the company turned up on our CANSLIM screen -- with an average price/earnings ratio over the past five years of 41, it might have done so. But these days AccuStaff's 1998 P/E is only 19, while analysts expect 31% annual earnings growth over the next three to five years, according to Zacks Investment Research. No wonder the stock has shown up on our Bargain Growth screen. AccuStaff's stock has fallen about 40% from its September 1997 52-week high of 32 largely on concerns over what the Asian economic crisis would do to the employment prospects at U.S. technology companies. And on Wednesday it closed at 23, down 7/16 on the day.
Yet there are many reasons to believe Wall Street overreacted, since it seems highly unlikely that the demand for skilled technical workers is going to decline. Led by an aggressive chief executive, AccuStaff has been the industry's most active consolidator, acquiring about 85 other companies in the past five years. Since it was founded by the merger of four regional firms, revenues have grown from $90 million in 1992 to an expected $3 billion in 1998. Sales in 1997 should total $2.2 billion, a 55% increase over the preceding year. Earnings per share are expected at 99 cents, almost triple 1996's record 35 cents per share.
The Jacksonville, Fla.-based firm has also used acquisitions to focus increasingly on the highest-margin segments of the staffing business -- professional services (legal and accounting, mainly) and information technology (IT) staffing. Those divisions total nearly two-thirds of their business, with one-third in traditional clerical and light industrial staffing. Gross margins have increased steadily to 25.7%.
AccuStaff's stock peaked in May 1996 but fell hard on fears that the economy was slowing, says Jeff Silber, an analyst with Gerard Klauer Mattison. The stock spiked this spring when the economy picked up, and began tumbling again this fall with concerns about the impact of Asia's economic crisis. It didn't help matters when the temporary-staffing firm Norrell (NRL) announced on Dec. 11 that an anticipated 15% earnings shortfall in the first quarter was due in part to an overall slowdown in the industry. In truth, says Silber, Norrell's problems had more to do with lost UPS business after the strike. AccuStaff's stock fell 2.5 points that day in sympathy.
That's not to say there aren't any red flags on the horizon for the staffing sector and for AccuStaff. Although a tight labor market helps the industry, it has gotten so tight lately that these firms are having trouble filling orders, which inhibits growth. "The good news is that their clients need help," says Peter Yessne, editor and publisher of Staffing Industry Report. "The bad news is that it is hard to help them." AccuStaff, like all top companies, is trying to do more to recruit and retain employees. Generally speaking, it just has to pay them more; luckily for AccuStaff, it has structured contracts so it can pass wage increases on to its clients.
Still, AccuStaff has a lot going for it. Its chief executive officer, Derek Dewan, has achieved some renown in the industry for his hard-driving, aggressive business style. "I call him the Bill Gates of this industry," says Silber, who credits him with creating the consolidation model for staffing firms.
Dewan is hardly slowing down. AccuStaff made four important acquisitions this quarter alone. All are strategic and are expected to add to earnings, says Meg Saegebarth of Goldman Sachs, who raised her 1997 earnings estimate on news of the acquisitions. Her 12-month price target is $39. The Boston-based Office Specialists, one of AccuStaff's acquisitions, will add $175 million in revenues and offices in key areas in New England where AccuStaff previously lacked a presence. Acquisitions of three London-based companies will expand AccuStaff's base in Europe; two of these firms specialize in IT staffing, the third in legal and accounting services.
AccuStaff is also growing internally. Saegebarth expects internal sales to grow 15% to 20% per year -- about 10% faster than the industry -- as the firm continues to focus on the highest-margin, fastest-growing segments of the staffing industry.
For now, demand for AccuStaff's services is keeping pace in the U.S. Whether unwilling to staff up (and add to fixed costs) or unable to hire the skilled professionals it needs, corporate America is expected to continue to turn to temporary-staffing firms. The Year 2000 problem, as well as new software and networking technologies, will fuel demand for information technology services in particular.
"There is plenty of work that needs to be done and I don't see it slowing down anytime soon," says Michael Abney, AccuStaff's chief financial officer. Even if the problems in Asia lead to a slight slowdown in business in the U.S., it wouldn't hurt firms like AccuStaff, says Yessne. With so many orders going unfilled, "10% less orders wouldn't make a heck of a lot of difference," he says.
AccuStaff's earnings may no longer be growing at the 141% rate of the past five years. But a long-term 31% annual growth rate is nothing to sneer at -- especially given the company's currently depressed stock price. Says Silber: "Obviously this is a company that is here to stay."
-- By Amey Stone
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