The European labor market is beginning to show signs of recovery after 24 months of struggles, according to William Blair & Company LLC Analyst Timothy McHugh. He says Manpower Group Inc. (MAN) is one outsourcing and recruiting firm that will benefit from positive trends in Europe.
“European staffing companies struggled for most of the last 18 months to 24 months, but signs have gradually gotten better as 2013 progressed, and I think as we head into 2014 you’ll see that continue,” McHugh says. “I’m not necessarily sure you’ll see a rapid pace of growth coming out of Europe, but I think growth is certainly going to improve relative to what we’ve seen before.”
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On top of that, McHugh says Manpower should reap the benefits in 2014 of cost-cutting efforts and European tax credits.
“I think the majority of the cost cutting this past year was actually offset by what I would call normal negative operating leverage because of the revenue declines the company was seeing, and the EPS improvement this year mainly came from that tax credit in France, or at least a large chunk of improvement in my view came from that,” McHugh says. “What that means to me is that as you go into 2014 and 2015, as revenue growth improves, that negative operating leverage we saw last year which offset the cost cutting should reverse, and so you should see good operating leverage as revenue picks up here.”
McHugh says he believes Manpower is poised to deliver earnings growth and exceed estimates. He says Manpower’s valuation is in line with its peer group, but he believes Manpower is better positioned for a positive 2014 than some competitors.
Corporate Resource Services Inc. (CRRS) recently acquired U.K.-based FlexPlus. As a result of that acquisition, CFO Michael Golde says Corporate Resource Services will introduce new recruiting process automation software to the U.S. market in 2014. The software, which FlexPlus branded as i-Integra, allows companies to streamline their recruiting processes.
“One of the things it does is it allows someone in-house at a company trying to recruit people to post the job, and that job to be automatically posted to multiple job boards at a reasonably low price through the monthly subscription,” Golde says. “We think that this is going to be very attractive to the marketplace, and we’re excited about bringing it to the U.S. In the U.K., there is a great deal of opportunity, like in the U.S.”
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Golde says FlexPlus has generate $600,000 in revenue since they began selling the i-Integra software to a small U.K.-market. He believes the potential market for the software is large.
“They haven’t even gone south to London yet or to other quarters of the country, so not only is it a great opportunity there, but we are in the process of making that software marketable for the U.S. market, and we’re going to be selling it through our 235 offices,” Golde says. “So there is a tremendous opportunity with that software.”
The stock prices of Pan American Silver (PAAS) and AuRico Gold (AUQ) are trading at below book value once replacement cost of reserves is factored in, said Eric K. Cinnamond, CFA, a Vice President as well as a Portfolio Manager for the ASTON/River Road’s Independent Value Portfolio at River Road Asset Management, LLC.
Explaining how he appraises these stocks, Cinnamond explained: “…so if you look at our largest miner holding, Pan American Silver, and the other large holding is AuRico Gold, both of these companies have extremely strong balance sheets. So we’re not saying gold and silver are going to spike higher in the near term. We don’t have an opinion on that. But what we are saying is we can buy their mines, their gold and silver reserves, at meaningful discounts to what it would cost to replace those reserves.”
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Speaking about the numbers behind the value of the PAAS stock specifically, Cinnamond continued, “We think there’s significant value there where book value is around $17 a share, and we can buy the stock today for under $11 a share. And of course book value can be written down, but if you look at the mine replacement cost actually coincides nicely with book value, and we think that is an appropriate valuation.”
In terms of understanding the full valuation of PAAS, Cinnamond claimed it must take into account its various assets. “How much would it cost to replace these mines, and in Pan American‘s case, their Dolores mine in Mexico and the La Colorada mine in Mexico, we think those mines combined are worth as much as the total enterprise value of Pan American Silver, and so in essence you’re getting the other five mines for free and a significant development property, Navidad, in Argentina, which the market is giving no value to, for free as well,” he said.
Macquarie Group Limited Analyst Kevin McVeigh says he considers Robert Half International Inc. (RHI) a good mid-cycle name that is currently trading at attractive levels. He expects Robert Half to enjoy incremental upside this year.
“This was a stock that had seen some pressure in 2013 as a result of a large contract that had expired and created about a 300 basis point headwind to the revenue,” McVeigh says. “That reverses itself in Q1 of this year, and should turn it around and help them grow that revenue that much more.”
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McVeigh says he also expects Robert Half to benefit from its Protiviti business. He says that segment peaked early relative to the overall sector. In 2006 and 2006, he says Protiviti actually created a $0.20 headwind to earnings. But, he says the segment is now “hitting its stride” and should contribute to upside for Robert Half in 2014.
“Our sensitivity suggests that for every 150 basis points of margin outperformance another $0.05 or so would accrete to the bottom line. So of our 10% margin assumption for Protiviti, if it is able to do 13% or so in 2014, that alone adds about $0.10 to earnings,” McVeigh says. “We continue to think there is a lot of optionality there, and the company also is wisely investing in front of what’s likely a pickup in demand, so expect to see some benefits from those investments as well.”
First Acceptance Corporation (FAC) stock returned 60% in 2013, thanks to the lower-risk nature of auto insurance and the lack of competition in the nonstandard end of the market, says Edward A. Crawford, a Partner and Co-Portfolio Manager primarily responsible for equity securities at Roumell Asset Management, LLC.
“It all added up to something we wanted to own — a balance sheet absent much risk, an overlooked stock trading for a very cheap multiple and high insider ownership by a savvy insurance investor. The stock returned nearly 60% for us last year,” he said.
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Crawford says FAC was trading at 70% book value when he first encountered it, a company with no analyst coverage and with not many visitors or competition.
“The nonstandard end of the market is somewhat of a niche market, and we believe it is less competitive than the standard market for auto insurance. Two of their competitors were acquired in the last several years for around two times tangible book value,” Crawford said.
Direct beauty seller Nu Skin Enterprises’ (NUS) stock price rose fourfold in 2013 from previous year’s lows due to unfounded fears of being associated with Herbalife Ltd. (HLF), says Andrew Absler, a Senior Research Analyst at Lombardia Capital Partners, LLC, and Portfolio Manager for the Small Cap Value Portfolio.
“The fears proved unfounded, and the stock experienced both multiple expansion and tremendous earnings growth. Today the stock is in excess of $130, which is approximately a fourfold increase from its lows,” Absler explained.
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Absler says about 10% of Nu Skin sales for its beauty and personal care products come from North America, and he says Asian markets currently provide significant growth for the direct seller.
Absler commented that Nu Skin’s stock performance in 2013 made it Small Cap Value Portfolio’s best performer. He added that others were not as keen on the stock during the controversy, but Lombardia did not follow the crowd. “Steve Malcolm is the primary analyst on the stock, and to his credit he stuck with the name during the controversy and pushed us to buy more when the stock was weak,” Absler said.
Mayr-Melnhof Karton AG (VIE:MMK) remains more cost-efficient than its competitors in the capital-intensive cardboard industry, yielding strong ROIC and a generous dividend in part due to its recycling of household paper waste for raw material, says David Nadel, the Portfolio Manager and Director of International Research for The Royce Funds.
“It’s a environmental, green play, and a business which is actually reasonably capital intensive, but they are a very cost-focused producer, and so they have pumped out 20% to 25% returns on invested capital year after year, with growth well exceeding GDP growth in the markets they serve globally,” Nadel said.
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Nadel says the Austrian cardboard manufacturer has strong growth prospects in Eastern Europe and Northern Africa, two regions with higher GDP growth rates, and he says the company continues stealing market share from the competition.
“It is certainly not in the glamorous sector, and it’s not exactly what the stock market is clamoring for in this age of Twitter. But it’s the type of business that you know is going to produce year after year, outpace GDP growth nicely and you get some improvement through scale, so the bottom-line grows and they generate high returns and give money back to shareholders in dividends.”
Starbucks Corporation (SBUX) displays strong global growth potential and strong financial characteristics in above-average rates of growth, a high-quality profile, strong cash flow generation, pricing power and repeat revenues, says George P. Fraise, Portfolio Manager at Sustainable Growth Advisers.
“It offers a product which is consumed around the world in a format which is an aspirational format for consumers. And it has been able to grow very rapidly both domestically, but importantly, increasingly outside of the United States to capture an opportunity which the company is still in the early innings of capturing outside of the U.S.,” Fraise said.
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Fraise says SBUX‘s main product is already interwoven in the lives of millions of people worldwide, and the nature of the product already leads to strong profit margins and repeat purchases, and there are large areas of the world that remain underpenetrated.
“Its financial strength comes from the strong balance sheet, strong cash flow generation, and management strength that continues to come through the vision and the direction that Howard Schultz and the rest of the management team have put in place. So Starbucks is a good example of a U.S.-based company that meets our strict investment criteria, has been a high-performing business recently and is a stock that we’ve done well with for shareholders over the long term,” Fraise said.
The Tribune Company (TRBAA) has emerged from bankruptcy with a strong balance sheet and continues displaying high upside potential, as the company holds several undervalued assets and may create shareholder value by splitting some of its component parts, says Edwin C. Ciskowski, Senior Vice President and Co-Portfolio Manager of Keeley Asset Management Corp.
“We have a fairly large position in Tribune Company (TRBAA). Tribune has emerged from bankruptcy with a much-improved balance sheet, and it’s another stock we believe is highly undervalued. They plan to split the publishing and the broadcasting divisions, which should aid shareholder value creation,” Ciskowski said.
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Ciskowski also says the network part could boost advertising revenue, and he mentions several assets the Tribune Company has a stake in that could be counted toward a higher stock price.
“In addition, WGN could boost ad revenue by dropping its superstation status. In addition, Tribune owns minority interests in a number of undervalued assets, including the Food Network, CareerBuilder and Classified Ventures,” Ciskowski said.
Cardinal Health Inc (CAH) generates larger amounts of free cash after refocusing its efforts on its core hospital supply business and diversifying away from its pharmaceutical distribution business, says John P. DeGulis, Partner and Portfolio Manager at Sound Shore Management, Inc.
“Cardinal is now back to growing, increasing margin, taking market share while continuing to diversify their hospital supply business,” he said. “They are also growing into the home supply business, which is a big growth market, as you might imagine.”
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DeGulis says the balance sheet at CAH was underlevered, and the dividend has grown above the market at 3%. He expects the dividend yield to increase, and he says management changes are beginning to translate in stock price increases.
“The stock has performed well over the last couple of years, particularly well this year where it’s up over 60%, and the market is starting to reflect a lot of the changes that Mr. Barrett and his team have instituted at CAH,” DeGulis said.
