Staffing Firm On Assignment Widens Its Reach With Buy
When a company spends as much on a single acquisition as it takes home in revenue every year, the deal tends to turn heads on Wall Street.
That can be a good thing or a bad thing, depending on how investors react.
ForOn Assignment ( ASGN ), a professional staffing firm, it was a good thing. On March 21, the company spent $600 million to buy Apex Systems, a provider of IT staffing services.
At first glance, the purchase price looked a little steep for On Assignment, which provides consultants to clients in the information technology, health care and life sciences fields.
The company logged 2011 revenue of $597 million. It had less than $420 million in annual revenue only three years ago.
But Wall Street cheered the deal. On Assignment's stock price rose nearly 27% to a 10-year closing high of 17.32 on the day the buyout was announced. Shares climbed to 19.37 a month later and currently trade near 16.
"We believe On Assignment purchased Apex Systems for a very attractive price. Apex's operational excellence should provide upside to expectations over time," analyst Paul Ginocchio of Deutsche Bank noted in a July 30 report initiating coverage on the stock.
The buyout was embraced in part because of the financial might it brings to On Assignment. Apex reported about $700 million in revenue last year. It earned $65 million before interest, taxes and other items. Its revenue has grown about 30% a year since 2000.
Equally important: The deal gives On Assignment a much bigger customer base.
"It gets the company more into the mainstream of the IT staffing market," said Randy Reece, an analyst at Avondale Partners.
Prior to the Apex buyout, On Assignment primarily focused on high-end IT consulting work through its Oxford business unit, he says. The company wanted to move into the mass market, but only if it could do so without having to slash its prices and margins.
The Apex deal lets them do that, Reece says. "It doesn't dilute On Assignment's operating leverage, and the company's gross margins are still good. It gives On Assignment a more sustainable growth trajectory than they would have had staying in the high-end niche of the staffing world."
The Apex unit has already made a big impact financially. It contributed $99 million to On Assignment's second-quarter revenue, which totaled $283 million.
Apex's top-line contribution was the most of any business unit, despite the fact the buyout didn't close until mid-May and added to results for only about six weeks.
Excluding the Apex numbers, On Assignment posted Q2 revenue of $184.2 million, a gain of 28% from the prior year. Earnings rose 75% to 28 cents a share, topping estimates by a nickel.
Adjusted EBITDA more than doubled from a year earlier to $32.3 million. The adjusted EBITDA margin was 11.4% vs. 10.3% the previous year.
On Assignment posted strong gains at nearly all its business units. Revenue at its Oxford, Physician and Healthcare segments each grew at least 35% year-over-year and topped consensus estimates.
The one laggard was the Life Sciences business, which fell short of views with sales growth of 2.2%.
"The life sciences segment saw some softness in the second quarter," noted Tobey Sommer, an analyst at SunTrust Robinson Humphrey. "Management highlighted ... a challenging environment for the back half of the year, as exposure to Europe and macroeconomic sensitivity impact this practice."
Overall, however, the quarter was greeted with enthusiasm by analysts and company officials.
"We were able to complete an acquisition that roughly doubled the size of the company while at the same time achieving above-market growth in our other businesses," Chief Executive Peter Dameris said in a statement.
While most of the recent attention has focused on the Apex deal and its impact on On Assignment's IT business, analysts sound equally bullish about prospects for the company's health care division.
Health Care Demand
"Health care reform should accelerate the job growth of health care overall and have a positive impact on health care staffing demand," Deutsche Bank's Ginocchio noted.
The IT sector is also primed for strong growth in coming quarters. SunTrust Robinson Humphrey's monthly poll of private staffing firms has shown steady improvement in technology staffing growth in recent months.
"Conditions seem ripe for IT staffing, which will comprise 70% of On Assignment's revenue," Sommer noted.
One advantage On Assignment has over much of the field is its ability to fill orders quickly, analyst Reece says. That's an important skill considering that many clients need immediate access to consultants to help iron out urgent problems.
"One unique thing about On Assignment is its heritage. It was created as a company that put recruiting ability ahead of everything else," Reece said. "They have developed expertise in filling hard-to-fill orders faster than everybody else."