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'Temporary' Insanity in the Price of Kelly Services
Posted by: Dr. Paul Price (IP Logged)
Date: October 4, 2012 10:11AM

We all know that the best stock bargains can only be purchased when you are willing to commit when others are selling in despair. This often occurs at times of overall market weakness. Sometimes it happens when company-specific or industry-related news appears bleak.

When these factors get superimposed on each other you can get such extreme pessimism that the values can more than reflect even the direst expectations. That appears to be the case now with temporary help agency Kelly Services (KELYA).

Note the extreme correlation between the action of the broad market and the shares of Kelly Services. KELYA’s highs and lows occurred almost exactly along with those of the S&P 500.





Kelly’s declines occurred despite the obvious improvement in fundamentals they’ve achieved over the past three years. Post-recession EPS rose 74.6% from $0.71 in 2010 to $1.24 last year. Even with European turmoil the 2012 estimate is now centered on $1.34. Zacks sees a 27.6% improvement for 2013.

Kelly’s European division appears to have weighed down the stock price performance much more than their results would justify. This is where the opportunity presents itself.

The S&P has about doubled since 2009. Kelly’s shares have had their rallies. The stock shot up dramatically from late 2009 to mid-2010. The shares jumped 127% from the 2010 low to their 2011 peak. KELYA gained 67.5% from last year’s low to its 2011 high in just a few months.

These shares are eminently tradable.

Kelly has no long-term debt. They pay a well-covered and secure dividend that provides a 1.61% current yield. Their 15% payout ratio leaves plenty of room for future increases. At Wednesday’s close of $12.45 Kelly is offered at just 9.3 times this year’s and 7.3x their 2013 estimate of $1.71.

Value Line sees a normalized P/E as being about 13.5x. Standard and Poor's carries a 12-month goal price of $21 which implies a multiple of 15.7x 2012’s and 12.3x next year’s consensus estimates. It should be noted that S&P carries higher projections than Zacks (see graphic below).



Longer-term thinkers might want to simply buy KELYA shares and wait for the true value to emerge. Value Line expects earnings per share to rebound to $2.25 no later than 2017. They see a three-to-five-year range of 100% to 181% above today’s price.



Book value is over $19 per share. You’re getting essentially the same yield as a 10-year Treasury bond but, unlike fixed income at record-low rates, KELYA offers upside. The lowest annual high touched in 11 of the past dozen calendar years was this year’s $18.09. It peaked above $20 during 10 of those years.

Traders can buy with a sell trigger 40% to 60% above the present quote. Investors can calmly build positions and wait for what should be 100% plus total returns.

Ironically, economic weakness may be a positive point for firms like Kelly and their competitor Manpower (MAN) as employers are more prone to add contract workers than permanent ones in today's unpredictable economic climate.

Management should be shareholder freindly. As of the April 2012 proxy officers and directors owned 20.7% of these Class A (non-voting) shares and 93.1% of the Class B - voting shares.

Disclosure: Long KELYA, MAN



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Re Temporary Insanity in the Price of Kelly Services
Posted by: moenchmoney (IP Logged)
Date: October 7, 2012 11:44AM

Great article. It looks like the majority of the balance sheet is accounts receivables. Do you have insight on why the accounts receivables seems to just go up and whether they will need to eventually write some of that down?


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