This post began by searching for stocks hitting their 52-week lows. DHI Group Inc. (DHX, Financial) reached its 52-low on Monday, April 3. At $3.90 it offered investors value. Then, the stock moved up over the next few days as I prepared this post. DHI Group closed Friday at $4.50.
The DHI Group is a microcap with historical, impressive, consistently high free cash flow margins that the market forgot. Revenue growth challenges from a difficult specialized job market and increased competition (mostly perceived) chased away the original shareholder base of magic formula growth investors. This overlooked investment has an asset-light business model that consistently generates the staffing industry's highest FCF yields. Also, coupled with its aggressive, opportunistic share buybacks, debt reduction and activist interest, the stock offers longer-term value investors a tempting opportunity.
Profile
DHI Group offers employment-related professional connections through several specialized job recruitment websites. Additionally, its software services search and analyze its proprietary resume databases. These targeted professionals work within the technology, financial services, energy, health care and hospitality industries. Above all, the goal is to allow professionals and organizations to access proprietary data to compete for employment connections. Employers and recruiters use their websites and services to find the most qualified professionals within their skilled occupations. Individual professionals use their websites and services to find the best jobs, industry news, detailed salary information and expand networking opportunities.
Its online recruitment packages target the difficult-to-fill employment categories experiencing a scarcity of skilled professionals relative to market demand. These online marketplaces are where employers and recruiters find employees. Professionals use the services to find job postings, news, career development and recruiting services. It's DHI Group's recognized web sites and the quality and size of its database of industry candidates that creates a competitive advantage.
Last, DHI has been in the recruiting and career development business for over 26 years.
Based on FASB accounting rules, DHI has three reportable segments; Tech and Clearance (Dice, Dice Europe and ClearanceJobs); Global Industry Group (eFinancialCareers, Rigzone, Hcareers and BioSpace); and Healthcare (Health eCareers). The other remaining services and activities individually are less than 10% of consolidated revenues, operating income or total assets.
Most of the revenues come from employers and recruiters who pay monthly or longer-term contractual agreements for recruitment packages. These packages offer a combination of website job postings and access to their database of resumes on Dice, Rigzone, eFinancialCareers, ClearanceJobs, Health eCareers, BioSpace and Hcareers.
This post will not be an operational deep dive. Or an analysis of the recruitment industry. Instead, I'll use DHI’s historical and competitors’ financial results for my investment case to justify its deep relative and historical valuation discount.
Current Valuation per Yahoo Finance as of April 7
Market Cap = $272.67 million
Enterprise Value = $272.67 million
EV/EBITDA = 5.79
52 week change = -45.30%
Year-over-year revenue change = -15.60%
Gross Profit Per Share = $3.92
Price Per Share on April 7 =$4.50
Important notes on valuation
Company has:
- A consistently high FCF margin with current gross profit per share near its current market price.
- An aggressive share-count and long-term debt reduction that compares favorably to a mean-reverting attribute and an unjustified enterprise value drop of 44% from 2013.
- Historical low valuation for EV/GP at 1.36 versus the average of 2.42 over 2013 to 2016 and EV/revenue also at historical low valuation.
DHI Group versus 15 staffing industry peers
- Price performance: Annualized three-year stock return is -14.78% versus the +2.13% for the comparable 15 staffing peers.
- Year-to-date stock return is -29.60% versus industry average of +2.78%.
- The enterprise value dropped -44.89% from 2013 versus the industry's +19.55% over the same three-year period.
- DHI Group's FCF and gross margins trounce its industry peers. Its trailing 12-month gross margin is +85.85% compared to the industry's +36.61%; FCF margin for the trailing 12 months is 14.19% compared to the industry's average of 3.17%; three-year (2013 to most recent quarter) average FCF margin is 16.68% versus the industry's 4.16%.
- DHI Group has made rigorous capital structure improvements with reduction in shares outstanding and debt from 2013 to the most recent quarter.
- Long-term debt per share for 2013 to the most recent quarter declined by 16.67% compared to the industry's increase of 46.22%.
- Over the same three-year period, shares outstanding were reduced by 7.74% compared to the industry's 0.79%.
See the supporting table below.
Industry analysis
Risk
LinkedIn (LNKD, Financial)'s increasing entry into the recruitment market is an industry concern. This company along with other competitors will impact pricing and growth.
Other risks include a recession or weak economic growth, an ill-conceived or poorly integrated acquisition pressured by the need for growth, a subscriber decline that will impact the brand's value and pricing power, and recent insider selling.
Opportunities
The company has an attractive absolute and relative valuation. It is a mean-reverting candidate with a valuation gap and the industry's worst performing stock price. It has a valuation at five-year lows for price-book, price-sales and stock price returns.
DHI has a history of sound capital allocation with management correctly weighing the benefits of acquisitions, technology improvements, debt reduction or share buybacks.
In the fourth quarter of 2016, the company announced a decision to explore strategic alternatives. A financial advisor was retained to aid its exploration of a possible sale, which could occur in the future.
Disclosure: I am long DHX.
