On Assignment Staffing Business Gains From Job Market

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When the economy turns south and companies start cutting payrolls, among the first workers to get the ax are temporary employees provided by staffing agencies.

On the flip side, when the job market improves and companies start hiring again, temp workers are usually among the first to get hired back.

That's certainly been the case recently as staffing companies likeOn Assignment ( ASGN ) look to meet increasing demand for their services amid an overall improvement in the U.S. job market.

On Assignment provides permanent and temporary staffing to clients in the IT, health care and life sciences sectors.

Last year, the company got 69% of its revenue from technology staffing. Health care and physician services contributed 18%, while life sciences accounted for the remaining 13%.

Staffing agencies are often used to fill employment gaps at companies that don't want to hire more expensive full-time workers. Companies get the labor without having to pony up for benefits or expensive training programs.

Recent jobs data suggest that a lot more companies will be adding staff, temporary and otherwise, in coming months.

The U.S. economy added 236,000 jobs in February, according to a Labor Department report. That was much higher than the 119,000 new jobs added a month earlier. The unemployment rate fell to 7.7%.

Job Market

Recent strength in the job market has been a boon to On Assignment and other staffing firms.

"The (turnaround) may be reflecting a pickup in demand for staffing, either because business is better or there is increasing optimism," analysts at Vermilion Technical Research noted in a report.

The bullish outlook for staffing firms is reflected in their current stock prices. The 20 stocks in IBD's Commercial Services-Staffing group are trading at a five-year high. The group's value has risen about 40% over the last four months.

In addition to On Assignment, stocks in the group includeRobert Half International ( RHI ),ManpowerGroup ( MAN ),51job ( JOBS ),Kelly Services ( KELYA ) andAMN Healthcare (AHS).

On Assignment's stock price set an 11-year high of 26.09 Thursday morning. But the company's shares have actually been trending higher since March 2009, when its stock price plummeted to a low of 1.28.

The recession that hit that year battered staffing firms in general and temp jobs in particular. Randy Reece, an analyst at Avondale Partners, says that during the worst of the recession, the number of temp jobs fell almost 35% from their pre-recession peak.

The rapid growth in temp jobs since then is mainly because there was so much room to grow, Reece says.

"One reason temp staffing jobs have grown faster than other jobs since the trough of the recession is that they were hit harder," he said. "Even now, temp agency employment is still 10% below the previous peak. The tantalizing upside potential is that (temp jobs) have rebounded this much in a very mediocre labor market."

Staffing firms like On Assignment not only benefit from new business, Reece says, but also from an improved operating model that should produce "high incremental profit margins" in coming quarters.

Margins should improve because many staffing firms have tightened up corporate spending in recent years, consolidated branch offices, and moved more of their business online.

"They haven't gutted capacity -- they've improved efficiency," Reece said. "Companies like On Assignment are set up to take on considerable more business."

In fact, On Assignment's business has more than doubled over the past year thanks to its $600 million buyout of Apex Systems, a provider of IT staffing services.

Prior to that deal, which closed in May, On Assignment mainly focused on high-end IT consulting work through its Oxford business unit. The Apex acquisition was designed to let On Assignment move into the mass market without having to slash its prices or margins.

During the fourth quarter, the Apex division contributed $207.6 million in revenue, more than half of the company total.

Overall revenue for the quarter more than doubled from the prior year to $401.7 million, beating consensus views for $387 million. Earnings gained 55% to 31 cents a share, topping estimates for 28 cents.

Gross margin for the quarter declined to 30.2% from 33.1% the previous year amid lower margins in the Apex division. Excluding Apex, gross margin rose to 33.2%.

On Assignment has now delivered 10 straight quarters of double-digit or higher sales and EPS growth.

'Positive Momentum'

On a conference call with analysts, On Assignment Chief Executive Peter Dameris said all of the company's divisions showed "positive momentum" during the quarter.

"Once again we saw particularly strong growth and strength in the IT end markets," he said. "Our Healthcare groups continue to make solid progress in improving their operating performance, (and) we saw solid execution in our Physician Staffing and Allied Healthcare groups."

Despite the better-than-expected sales and earnings, On Assignment shares fell 11% the day after it reported Q4 results amid investor concern over the company's conservative guidance for 2103. Shares recovered in less than three weeks, however.

Analysts polled by Thomson Reuters expect On Assignment to grow full-year earnings 4% this year and 22% in 2014.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: ASGN , JOBS , KELYA , MAN , RHI

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