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This Little-Known Stock is Surging on Jobs Growth

Michael Vodicka

There is very clear evidence the job market is gaining momentum. And the implications for stocks and the economy are huge.

The latest jobs report from the Bureau of Labor Statistics shows the economy added 236,000 jobs in February. Not only was that well ahead of expectations of 171,000, but it was also one of the biggest gains in the past two years. It also helped push the stubbornly high unemployment rate down to 7.7% from 7.9%.

The implications of jobs growth are huge. It stimulates consumer spending and increases government tax revenue, which are powerful forces to lift the economy. While strong job growth will benefit many companies, I've identified one that stands to gain the most.

In fact, it's already happening. Shares are up nearly 21% in the past three months while analysts continue to revise earnings estimates higher. Take a look at the chart below.

The stock I am talking about is Robert Half (RHI), a global leader in staffing and outsourcing services.

Although the company operates in multiple professional disciplines, it specializes in the tax, accounting and finance, and technology fields. Robert Half has operations in North America, South America, Europe, Asia and Australia, providing it with strong geographic diversification.

The company has already been gaining on growing momentum in the jobs market, with shares up 21% in the past three months. But looking forward, there are more than a few reasons why Robert Half is in the perfect position to benefit from more jobs growth.

The first is a fundamental shift in how companies are structuring labor resources. Employing workers full time is expensive, which has many employers increasingly relying on temporary workers to drive margin strength. According to a study by CareerBuilder and Economic Modeling Specialists, 40% of employers plan to hire temporary and contract workers in 2013, up from 36% in 2012. That fundamental shift in how companies source labor resources in a huge tailwind for Robert Half.

Robert Half also has big growth potential in the massive and highly profitable staffing services market for the information technology (IT) industry. Robert Half is already a leader in the tax, accounting and financial services markets, providing a strong source of recurring and new revenue. But the size of that market is dwarfed by the IT staffing market. Robert Half is using its presence as an established player in tax and accounting services to secure contracts for information technology labor resources.

Robert Half is also benefiting from its emphasis on smaller firms with 50-100 employees. Not only do these accounts tend to carry higher margins due to their smaller scale, but management has reported a big uptick in demand for staffing services from companies within this demographic because of a desire to employ less than 50 full-time employees to avoid expenses associated with the Affordable Care Act that will go in effect in 2014 for companies with more than 50 full-time employees.

Robert Half is also a shareholder-friendly company. It bought back a total of $133 million in shares in 2012, or about 2% of the company. In the past eight years, Robert Half has bought back about 21% of the company through open market purchases. The company also recently raised its dividend by 7% to 16 cents a share, lifting its dividend yield to nearly 2%. That dividend will cost about $89 million a year, but with net cash of $286 million at the end of 2012 and free cash flow of $240 million in the past year, Robert Half has plenty of financial power to support dividend growth.

Risks to Consider: Even though the long-term potential looks great, shares are up 32% in the past six months. Some profit taking as shares trade at an all-time high could be a short-term headwind.

Action to Take --> With the recent jobs report showing one of its biggest gains in two years and pushing the unemployment rate to its lowest level since 2008, the job market is showing clear signs of a recovery. Robert Half is in position to benefit from the trend as a leader in tax, accounting and financial staffing services, its penetration into IT markets, strong financial profile and shareholder-friendly disposition. If Robert Half traded with its average forward price-to-earnings (P/E) ratio of 27 in the past 10 years, then shares would jump to $49, which is a 35% premium from current levels.

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