Manpower Is A Buy On Post-Earnings Weakness

Labor Stocks Will Boom In 2021

Labor stocks are set to boom in 2021, it’s just that simple. Despite all the headwinds provided by the pandemic, the labor market has been able to hold up rather well and the economic rebound is already on. Based on what the CBO says, economic activity in the U.S. should reach its pre-COVID levels this year, well ahead of the previous forecast. They say it may be another year before the labor market fully recovers its pre-pandemic strength but we think that forecast is very cautious. And besides, it doesn’t really matter. The economic rebound is going to gain momentum fast with the widening availability of vaccines and that means jobs, jobs, jobs and ramping business for these companies.

The labor-related business like Automatic Data Processing (NASDAQ:ADP), Cintas (NASDAQ:CTAS), Paychex (NASDAQ:PAYX), and ManpowerGroup (NYSE:MAN) saw small YOY declines in revenue during 2020 that are already nearly recovered. The great news is that their revenues were not impacted so much by the loss of clients but by the amount of revenue generated per client. In total, most have increased their client count which has them leveraged for revenue and earnings growth as the rebound unfolds and hiring picks up.

Manpower Smashes Consensus On Brightening Employment Outlook

Manpower had a solid 4th quarter and I can’t say I am not surprised. Not only is the core employment data, not just the weekly jobless claims or monthly payroll figures, showing steady and marked improvements from month to month but the company forecast its own success. Manpower released the results of its quarterly hiring survey and the results were good. 32 of the 43 countries included in the survey had a positive uptick in hiring plans with the bulk of them up at least 5% from the prior quarter. Leading the charge is Taiwan with a 27% increase in plans for hiring followed by the U.S. at 17%.

So, Manpower, a global hiring and employment specialist, reported $5.05 billion in consolidated revenue to beat the consensus by 650 basis points. Sequential growth came in at 10%, down a bit from the prior quarter, but still strong despite the -2.95% decline from last year. Moving down to the bottom line, the company delivered $1.33 in GAAP and $1.48 in adjusted earnings which are both better than the consensus. GAAP eps beat by $0.15 while adjusted beat by a wider $0.33 margin.

Jonas Prising, Manpower Group Chairman & CEO, said, "Our fourth-quarter results reflect a continuation of the revenue recovery that began in May 2020. Despite experiencing a series of ongoing lockdowns around the world during the fourth quarter, our results reflect a stronger market environment, including revenue growth and new opportunities in select markets. The combination of our tech and PeopleFirst approach – the talent, skills and dedication of our teams – allows us to confidently manage uncertainty, volatility, collaborate remotely and be more agile than we ever believed possible.

Manpower Is A Value Relative To Its Peers

Manpower is not a value relative to its direct peers, other staffing and employee-focused businesses, but none of them pay a dividend. Trading at 27X this year’s and 17X next year’s it is trading at a significantly higher valuation but it is in a different class. When compared to other dividend-paying labor market stocks, however, the value quickly becomes apparent. Cintas, arguably the best-in-breed among the labor stocks, is trading at 34X this year’s and 32X next year while Paychex and ADP are not far behind.

Regarding the dividend, Manpower yields about 2.6% and has a positive outlook for dividend increases. The company has been increasing the distribution for 10 years including this year and has the cash flow to continue upping the payout long into the future. There is a red flag in the payout ratio, it is running about 70% of this year’s earnings but that is mitigated by the earnings outlook. The rebound in 2021 should see EPS grow about 60% and bring the payout ratio to a more acceptable 50% or less. And the balance sheet is a fortress with low debt, enough cash on hand to pay all off, and high free cash flow. Others in the group pay safe yields as well but all with lower yield except for Paychex.

The Technical Outlook: Wait To Buy Manpower, Have Cash Ready

The Q4 report has shares of Manpower down about 3.5% and heading lower by the looks of things but this is going to set up a buying opportunity. The price action is near a potentially strong support level that should hold up in light of the expected rebound. If support is able to hold price action may move sideways within the range of $85 to $95 before moving higher later in the year. If support is not able to hold then this stock may fall down to the $80 or $75 level where the value-to-yield proposition will be even more attractive.

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