On Aug 8, Zacks Investment Research downgraded staffing and outsourcing services provider Kelly Services, Inc. (KELYA) to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold), primarily due to a poor earnings miss in the just-reported quarter.
Kelly Services’ share prices have gone downhill since April this year. Despite the downtrend, the company still has the potential to drive the stock up as it completes the transition of large U.S. accounts into a centralized service delivery model. The stock is currently trading at a forward P/E of 20.6x.
Why the Downgrade?
Kelly Services reported dismal second-quarter 2014 results with non-GAAP earnings of $4.0 million or 10 cents per share, down from $12.5 million or 33 cents per share in the year-ago period. The adjusted earnings badly missed the Zacks Consensus Estimate of 18 cents.
GAAP income of $2.8 million or 7 cents per share also decreased significantly from $10.0 million or 26 cents per share in the year-ago quarter. The year-over-year decrease in earnings was primarily due to higher operating expenses. Although total revenue increased 3.2% year over year to $1,410.5 million, it failed to meet the Zacks Consensus Estimate of $1,414.0 million.
Management further expects operating expenses in the upcoming quarter to be adversely affected by regulatory pressures including the impact of implementation of the Affordable Care Act. At the same time, investments to drive growth in the PT (Professional Technical) staffing business and develop the solutions capability in OCG (Outsourcing and Consulting Group) are likely to strain the operating margin.
The current Zacks Consensus Estimates for the ongoing quarter and full year 2014 are pegged at 35 cents and 77 cents, respectively, representing a year-over-year decline of 30.4% and 52.8%. These reflect a negative investor perception about the growth prospects of the company. Consequently, Kelly Services is susceptible to further downgrade in the imminent future.
Other Stocks to Consider
Other stocks in the industry that are worth reckoning include ManpowerGroup Inc. (MAN), Robert Half International Inc. (RHI) and TrueBlue, Inc. (TBI), each carrying a Zacks Rank #2 (Buy).