Kforce (KFRC, Financial) fell almost 20% on Wednesday after posting disappointing results.
Fourth-quarter revenues were expected to be $336.2 million, but the company only delivered $327.7 million. Kforce is a staffing services firm headquartered in Tampa, Florida, with 63 field offices in the U.S. The company also offers international staffing services through Kforce Global Solutions, but it comprises less than 2% of net service revenue.
In 2014, Kforce sold its Healthcare Information Management division to focus on its core units, Technology, Finance & Accounting and Government. The Technology division accounts for approximately 65% of revenue. Finance & Accounting represents 24% of revenue and Government accounts for 11% of revenue.
Kforce’s operations give insights into developing labor market trends. The company sees the following growth drivers:
- Companies are becoming more sophisticated in managing their workforces and are using temporary labor for flexibility.
- Uncertainty related to economics and government regulations incentivize companies to use contract labor.
- Regulations such as health care reform make contingent labor an attractive option.
- Technology skills are in short supply, and companies are having difficulty finding candidates with the right technical skills.
- Science, technology, engineering and math (“STEM”) are increasing three times faster than the rest of the U.S. economy.
- There’s a projected shortfall of 230,000 STEM workers by 2018.
- ”‹College-educated workers have a much lower unemployment rate.
- The graph below shows how temporary employees make up an increasing percentage of the labor force.
From Kforce Investor Presentation
Financial highlights from conference call
For the year ended 2015, revenues grew 8.4% to $1.32 billion and net income was $42.8 million. EPS improved 63% over last year to $1.52. Revenues were lower than expected for the fourth quarter as a number of major clients deferred projects. The company has some concentration risk as the top 25 clients make up 37% of the technology group’s revenues.
Despite the slower than expected fourth quarter, the IT staffing sector has tailwinds such as rapid pace of technological change, growth in project-based work, imbalance in supply and demand of IT workers and new IT investments. As a result, the technology group grew 6.1% for the full year.
The CEO states, "Broad-based undercurrents that are helping drive technology staffing demand such as cloud computing, SaaS [Software as a service], data analytics, mobility and cyber security will continue. … The scarcity of highly skilled technology resources is expected to continue with unemployment levels of these resources being very low. BLS [Bureau of Labor Statistics] temp penetration number remains near a record high since the secular shift toward temporary staffing continues.
"The combination of the need for flexibility, highly specialized skills, the project nature of work and the regulatory environment is driving customers to greater use of flexible resources. Across the whole staffing sector, the average spending regulatory requirement particularly around employee classification has created a higher risk employment environment for clients. We believe this will contribute – continue to contribute – to larger staffing firms with robust compliance infrastructure increasingly being considered solution of choice for human capital."
The Finance & Accounting division outperformed the Technology division and grew 18% for the full year. For the long term, there are an increasing number of projects related to system conversions, M&A, tax and accounting requirements. Revenue for the Government Solutions division decreased 13.9% year over year in the fourth quarter. The sector faces budgetary pressure and uncertainty. However, the government is the largest domestic consumer of technology services. It has an aging technology infrastructure, and technology is not a core competency of many agencies.
Final thoughts
Although the share price of Kforce has fallen significantly in the last couple of days and the company has a low PE ratio of 10, this company is not an attractive investment opportunity yet. Kforce has not demonstrated enough consistency in its results. From the graph below, one can see how volatile net income has been over the last 15 years.
There has also been a large volume of insider selling and no insider buying over the last several years.
In addition, Kforce operates in a highly competitive industry where it doesn’t have any competitive advantages. Clients and contractors frequently do business with multiple staffing agencies.
It’s still worthwhile to follow Kforce to observe labor trends. For instance, the company notes that there is strength in cloud computing, analytics and cyber security labor while its government-based staffing is challenged due to budget constraints. These are helpful observations when researching IT businesses or companies that sell to the government.
Furthermore, the increase in temporary labor may give insight into consumer spending patterns as it seems many people are holding off on big purchase items. Another item to keep an eye on is whether Kforce's largest customers continue to defer large projects as it would imply companies are cutting back on capital spending.
