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Barrett Business: A Strong Buy

Zacks Equity Research

Impressive fiscal third quarter 2012 (ended Sep 30, 2012) results, which surpassed the Zacks Consensus Estimate, as well as high earnings estimates helped Barrett Business Services Inc. (BBSI) achieve a Zacks #1 Rank (Strong Buy).

Since the release of its third-quarter results on Oct 23, shares of this business management solutions provider have surged about 27.9%. Moreover, considering its robust growth (year-to-date return of approximately 74.0%) and the history of beating quarterly earnings estimates (including an average beat of 10.5% over the trailing four quarters), it can be stated that this stock offers an attractive investment opportunity.

The Rank Driver

An impressive record of beating the quarterly earnings expectations, a positive fiscal 2012 outlook, and a decent dividend yield, are the major rank drivers for this stock.

With respect to earnings surprise, Barrett Business Services has been beating the quarterly earnings expectations for the last three years. In the third quarter of fiscal 2012 it topped the estimate by 14.1%.

On Oct 23, 2012, Barrett Business Services reported third-quarter earnings per share of 81 cents, ahead of the Zacks Consensus Estimate of 71 cents. Moreover, it surged 50% from the year-ago quarter.

Revenues soared 30% year over year to $111.1 million, driven by strong growth in the Professional Employer Organization (PEO) client count and strong same-store sales growth. The company’s professional employer services and staffing services business segments reported revenue growth of 40.5% and 4.6%, respectively.

Management acknowledged the solid client base and asserted that client retention was strong. The company attributed the solid results in the quarter to Barrett Business Services’ maturing brand and strong referral channels, which helped drive new clients along with its ability to retain them.

In the fourth quarter, the company projects gross revenues between $585 million and $590 million, with earnings per share in the range of 75 – 78 cents.

Barrett Business Services rewards its shareholders through regular and increased quarterly dividends. In November, the company announced its fourth-quarter 2012 dividend of 13 cents per share, payable today (Dec 14, 2012) to shareholders of record as of Nov 30, 2012, reflecting an increase of nearly 18% from the dividend paid in the third quarter of 2012. This yields a solid 1.45%, while the company has a payout ratio of 39%. We believe that the company’s continuous dividend payment and increments reflect its earnings growth capacity and cash flow generation.


Currently, Barrett Business Services trades at a forward P/E of 23.28x, slightly above the peer group average of 21.77x. Again, its price-to-book and price-to-sales ratios of 5.23 and 0.68 are at a premium to the peer group average of 2.55 and 0.67, respectively.

However, the company’s trailing 12-month ROE of 20.0%, against 6.8% for the peer group, suggests that it actively and efficiently reinvests its earnings compared to the peer group. In addition, these compelling fundamentals are well supported by the company’s long-term estimated earnings growth rate of 35.0% compared with 17.8% of the peer group.

The company’s shares have been advancing since the beginning of calendar year 2012, gaining a robust 74% year-to-date.

About The Company

Barrett Business Services has roughly 47 years of experience in providing business management solutions. The company offers staffing and professional employer organization services, which help employers to manage employment-related issues efficiently while reducing operational costs to a great extent. The host of service offerings includes payroll processing, employee benefits and administration, workers’ compensation coverage, effective risk management and workplace safety programs, and human resource administration. The company has a market cap of approximately $255 million.

Barrett Business Services, which competes with Insperity, Inc. (NSP), currently holds Zacks #1Rank, implying a short-term Strong Buy rating. We are also maintaining a long-term ‘Outperform’ recommendation on the stock.

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