Despite making a post-pandemic recovery, this company is priced as if profits will never return to pre-pandemic levels. ManpowerGroup (MAN: $99/share) remains a Long Idea after 3Q21 earnings.
We leverage more reliable fundamental data, as proven in The Journal of Financial Economics[1], and shown to provide a new source of alpha, with qualitative research to highlight this firm whose stock present excellent risk/reward.
ManpowerGroup’s Attractive Risk/Reward
We made ManpowerGroup a Long Idea in July 2018 and the stock has underperformed the market since then. However, the stock’s 20% decline since September 2, 2021 is overblown and presents investors with an opportunity to “buy the dip” in a stock with plenty of upside.
Figure 1: Long Idea Performance: From Date of Publication Through 10/26/2021
Sources: New Constructs, LLC and company filings
What’s Working:
ManpowerGroup’s total revenue rose 12% year-over-year (YoY) in 3Q21, while its Experis and Talent Solutions segment revenues exceeded pre-pandemic levels. Experis and Talent Solutions accounted for 37% of the company’s total 2020 gross profit, so the growth in these segments bodes well for a future rebound to and above 2019 levels. The company expects its business recovery to continue as it guided for 5-9% YoY revenue growth in 4Q21.
Growth in the company’s higher margin Experis and Talent Solutions segments have improved ManpowerGroup’s profitability, despite operating in a highly competitive industry. The company steadily improved its net operating profit after tax (NOPAT) margin from 1.1% in 2010 to 2.6% in 2019 before the pandemic. After falling to 1.6% in 2020, margins have improved to 1.9% over the TTM. Rising margins drive ManpowerGroup’s return on invested capital (ROIC) from 5% in 2010 to 9% in 2019. Over the trailing-twelve-months (TTM), the company’s ROIC is 7%, which is up from 5% in 2020.
As one of the largest staffing companies in the world, ManpowerGroup leverages its global presence to deliver innovative offerings to clients, which creates a long runway for continued growth. For example, ManpowerGroup’s Experis Career Accelerator, an AI-driven platform, leverages the company’s large amount of employer and employee data to assist the company in finding in-demand roles and provide better job matches across its network.
Unlike most other businesses, which are struggling to manage inflationary pressure, ManpowerGroup’s fee structure means that inflation has little effect on the company’s operations, as increased costs are passed directly to its clients.
What’s Not Working:
As a provider of staffing, recruiting, and workforce consulting services, the decline of supply in the labor market is a headwind for ManpowerGroup’s growth.
Even though revenue from Southern Europe, the company’s largest region, grew 13% YoY in 3Q21, the company expected a stronger showing from France after many of the heavy, pandemic-related restrictions were lifted in the country. While investors may have been disappointed with the lackluster growth in 3Q21, we expect employment service demand to eventually reach pre-pandemic levels, given the expected growth rate of the industry.
In the United States, the long-term decline in labor participation remains in place. The labor force participation rate in the U.S. steadily fell from 67% in 1998 to 63% in 2019. In 2020, the participation rate fell even lower to 62%, its lowest level since 1975. More recently, the pandemic caused many baby-boomers to retire and exit the labor force completely, while others have delayed reentering the labor force due to unemployment benefits and concerns about childcare and personal health.
Nevertheless, there is still room for employment service companies, such as ManpowerGroup, to grow. Despite the unfavorable labor participation trends, ResearchAndMarkets expects the global employment services market to grow 9% compounded annually from 2021-2025.
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This article originally published on October 27, 2021.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, style, or theme.
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[1] Our research utilizes our Core Earnings, a more reliable measure of profits, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.
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David Trainer, Kyle Guske II, Sam McBride, Matt Shuler, Alex Sword, and Andrew Gallagher receive no compensation to write about any specific stock, style, or theme.
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