Bearish View on Manpower
ManpowerGroup’s (MAN) soft second-quarter 2012 results and dismal third quarter outlook compelled us to take a bearish stance on the stock. Consequently, we downgraded our recommendation to Underperform with a target price of $29.00. Earlier, we had an Outperform rating on the stock.
Analyzing Quarterly Results
ManpowerGroup hinted that the current sluggish macroeconomic environment resulted in soft demand for recruitment services, particularly in Europe, and weighed upon its second quarter results. Strong dollar also acted as a deterrent.
The quarterly earnings of 76 cents a share dropped 12.6% from 87 cents earned in the prior-year quarter but surpassed the Zacks Consensus Estimate of 72 cents. Unfavorable foreign currencies fluctuation undermined the earnings by 7 cents.
Total revenue of $5,206.7 million tumbled 8.1% from the prior-year quarter and 0.8% in constant currency, and also fell short of the Zacks Consensus Estimate of $5,224 million. The company had earlier projected total revenue of flat or down 2% in constant currency.
The sharp high single-digit drop in the top line followed a meager growth of 0.5% registered in the first quarter. We apprehend that the company could witness declining revenue and margin pressure due to the ongoing Eurozone crisis.
We observe that although cost of services decreased 7.7% to $4,345 million, gross profit fell 10.4% to $861.7 million due to a decline in the top line. Gross profit margin shriveled 50 basis points to 16.5% due to a fall in permanent recruitment revenue and a soft temporary recruitment gross margin in a few European countries.
Soft Outlook
Manpower, which competes with Kelly Services Inc. (KELYA) and Robert Half International Inc. (RHI), provided a soft outlook for the third quarter. The company now expects earnings between 64 cents and 72 cents a share, reflecting a year-over-year decline of 34% to 25.8%. Management now expects total revenue to be down by 3% to 5% in constant currency.
Including currency exchange rates, it is expected to fall 11% to 13%. On a segment basis, management anticipates revenues to contract sequentially in the Americas, Southern Europe and Northern Europe. However, it forecasts a low single-digit growth in Asia-Pacific Middle East and Right Management.
Downhill Estimates Revision
Following Manpower’s second-quarter 2012 results, the Zacks Consensus Estimates have been portraying a downward trend.
The Zacks Consensus Estimates for the third and fourth quarters dropped by 12 cents and 10 cents to 68 cents and 74 cents a share, respectively, in the last 7 days, with 9 out of 13 analysts covering the stock lowering their estimates.
For fiscal 2012 and 2013, the Zacks Consensus Estimates also slipped 13 cents and 33 cents to a respective $2.71 and $3.14 in the last 7 days, on account of downward revisions in the estimates made by 9 and 10 analysts, respectively.
Closing Commentary
The above analysis supports our unbiased view, and advocates our bearish opinion on the stock, which is well defined through our Zacks #5 Rank that translates into a short-term Strong Sell rating.
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