We adopted a Neutral stance on ManpowerGroup (MAN), a global leader in the employment services industry, with a price target of $40.00, following better-than-expected third-quarter 2012 results. Earlier, we had an Underperform recommendation on the stock.
The company posted stronger-than-anticipated results on the back of increased gross margin and effective cost management. The quarterly earnings of 79 cents a share surpassed the Zacks Consensus Estimate of 68 cents. Net earnings per share also came ahead of management’s previously provided guidance range of 64 cents to 72 cents a share.
Manpower’s comprehensive range of services makes the company a true global staffing firm. The company provides services for the entire employment and business cycle including permanent, temporary and contract recruitment, employee assessment and selection, training, outplacement, outsourcing and consulting. The company’s brand value and strong global network provides it with a competitive advantage and reinforces its dominant position in the market.
The company is now contemplating on exiting its lower margin business and venturing into high margin business. The company is also focusing on controlling expense. On the other hand, the ManpowerGroup Solutions business sustained its growth momentum. The demand for the countercyclical outplacement services is also portraying signs of steadiness, which rose 18% during the quarter.
However, what compels us to have a cautious view on the stock is the company’s dwindling top and bottom lines performances as well as soft projections of the same for the fourth quarter. The quarterly earnings did came ahead of the estimate but it fell 18.6% year over year as the soft economic environment resulted in weak demand for recruitment services, particularly in Europe. Strong dollar also acted as a deterrent.
Moreover, the rate of decline in total revenue of Milwaukee, Wisconsin based Manpower has accelerated, when comparing sequentially. After falling 8.1% year over year in the second quarter of 2012, total revenue dropped 10.5% to $5,172.3 million during the third quarter. In constant currency too, the rate of decline increased to 3.8% in the quarter under review from 0.8% in the previous quarter. The soft top line performance did weigh upon the bottom line. However, one thing that instilled confidence was that unlike the second quarter, total revenue in the third quarter beat the Zacks Consensus Estimate of $5,106 million.
Manpower provided a dismal fourth-quarter 2012 outlook. The company now expects earnings between 72 cents and 80 cents a share, reflecting a year-over-year decline of 26.5% to 18.4%, respectively. Management now projects total revenue to decline between 5% and 7% in the U.S. dollars, or in the band of 3% to 5% in constant currency from the prior-year quarter.
Given the pros and cons, we prefer to remain on the sidelines. Manpower, which competes with Kelly Services Inc. (KELYA) and Robert Half International Inc. (RHI), holds a Zacks #3 Rank that translates into a short-term “Hold” rating.
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