I don’t normally talk about value traps because it’s almost always better to be long than short, but the more I think about what companies will be absolute in the future, it seems time is up for staffing services companies.
Since Manpower Group (MAN, Financial) is one of the largest staffing companies, it will likely be one of the last to fall. Going forward, I think it will need to adjust its business model or risk being dead money for investors. Manpower serves each category - temporary, permanent and project-based - helping it generate $568 million in profit on $21.8 billion in sales. It pays a decent dividend (2.1% yield) and has bought back stock to boost earnings per share and book value.
The one good statistic is that over 80% of its revenue is generated outside the United States through an estimated 400,000 clients and 3.4 million placements during 2017. Strength in Europe and Asia helped the company increase its revenue 9.5% year over year, which is why the stock has bounced back from its 52-week low. It’s the long-term future I’m worried about.
Manpower’s temporary staffing operations account for more than 75% of annual revenue and could easily come under pressure, pushing margins even lower. In the last decade, sales have gone nowhere. Yes, the company has become more efficient, as evidenced by the increased profit despite stagnate sales. Yes, it doesn’t require much capital spending to operate. Temporary office and industrial staffing, however, are among the more commodified job placement, which greatly limits pricing power and profit margins in Manpower's best-selling department.
How easy is it to open a placement firm? Very. With the right connections and a few bucks, anyone can leave their current recruiting company and compete with Manpower on individual placements, making more money doing it for cheaper rates to the end user. More importantly, macroeconomic and regulatory trends in many of the countries it operates in will weigh on its ability to grow. And grow it must. This is an industry ripe for disruption again. When the internet became mainstream, tons of job posting websites came online, spoiling the easy money from staffing agencies. This industry may never have the kind of moat it once did, and that’s the biggest reason to stay away from Manpower and others like Adecco (XSWX:ADEN, Financial) and Randstad (XAMS:RAND, Financial).
Of course, the rise of the machines is ultimately what will put staffing agencies down for the count. I think we’re going to a near zero employment environment in the next 30 to 40 years if projects for artificial intelligence pan out - but only time will tell. While the current numbers make it look like the company is improving, Manpower’s best days are behind it.
Disclosure: I am not long or short any stocks mentioned in this article.
