LTNC: Initiating Coverage of Labor Smart With a Buy Rating
By Marla Backer
We initiate coverage of Labor Smart (OTC BB:LTNC) with a Buy rating and $0.80 price target on the shares. Labor Smart is an emerging growth company that serves the on demand labor market, focusing primarily on filling blue-collar staffing positions on a temporary basis. Since launching operations in 2011, Labor Smart has pursued an ambitious expansion strategy. In just two short years, the company has grown its footprint to 14 branches operating in nine states, up from only two in 2011, and annual revenue to an estimated $15.5 million in 2013, up from only $0.16 million in 2011. With a seasoned industry veteran at the helm, a strong operating team, an aggressive growth strategy and the tailwind of favorable sector dynamics, we believe Labor Smart has strong prospects in the on demand staffing industry.
While most of the early growth has been organic through new branch openings, earlier this month the company acquired the operating assets of Qwik Staffing Solutions, a small staffing company based in Florida. Management anticipates that Qwik Staffing Solutions will contribute more than $3.2 million in revenue and roughly $350,000 in EBITDA over the next 12 months. The acquisition gave Labor Smart entry into the Florida market at an attractive price. The metrics imply that Labor Smart paid roughly 1.0X EBITDA. By comparison, competitor True Blue recently acquired MDT, one of the largest on demand staffing companies in the industry, and has indicated that it paid 4.0X EBITDA.
Moreover, we believe Florida is one of the most active markets for on demand labor. According to the Associated Press (AP), Florida, along with Texas, Arizona, California, and Colorado is experiencing a dramatic shortage of labor for the rebounding construction industry because so many workers exited the industry during the recession. AP notes that “many former skilled construction workers have moved on to other fields.” Labor Smart specializes in meeting the staffing needs of companies in the construction sector, among others. The Florida branches can also leverage the base of regional and national customers that have already done business with different Labor Smart branches. For example, the Tampa branch manager can introduce the Tampa branch to a customer that has used Labor Smart services in Chattanooga and leverage that existing corporate relationship.
Reflecting its dramatic footprint expansion, Labor Smart recently reported revenue of $2.5 million for the first quarter ending in March 2013, up 112% from $1.183 million registered in the prior year first quarter. The company also recently announced that it had achieved revenue of $1.0 million for the month of April 2013 versus $0.52 million in April 2012. This represents a 94.6% year-over-year increase and further illustrates, we believe, the momentum that Labor Smart enjoys. Management has provided guidance for 2013 revenues of $15.5 million. Given the growth illustrated in the first quarter of 2013, as well as in April, and the consolidation of Qwik Staffing Solutions, we believe the company can attain or possibly exceed this goal as it drives branch expansion.
We believe branch expansion and corollary customer base expansion are key to driving revenue growth. The company intends to develop a national footprint over the next few years. Its growth strategy is to: 1) expand through new branch openings; 2) boost revenue as branches mature by broadening the range of staffing services they provide, and 3) leverage relationships with large regional or national customers to fill staffing needs across multiple verticals and multiple geographic markets.
While the temporary staffing industry has few barriers to entry, we believe that experience and relationships are crucial to the success of an on demand staffing organization. Labor Smart’s founder and CEO has about 13 years of industry experience, the company’s five district managers have a combined 65 years of operating experience and the company is assembling a strong, seasoned Board of Directors. The industry is highly fragmented. A handful of global players such as Manpower and Kelly Services compete with a few national operators and myriads of small mom and pops. Few compete in the on demand niche in which Labor Smart operates and which is more specialized. Management believes its expanding footprint can provide a competitive advantage that can enable Labor Smart to leverage its marketing efforts and work with customers across several markets.
We believe sector trends are favorable and will enhance Labor Smart’s expansion plans. Historically, the growth of the U.S. staffing industry has outpaced that of the general economy. Over the past 20 years, real GDP has averaged 2.5% per annum growth while the temporary staffing industry has averaged 4.8%. Several factors are likely to fuel continued industry growth, in our view, including the economic recovery and upcoming regulatory changes to the healthcare system. The Affordable Care Act is generally expected to stimulate demand for temporary and on demand staffing because when the initiatives go into effect in 2014, companies that employ more than 50 full-time workers will need to provide healthcare coverage to them or pay penalties of up to $3,000. We also believe that economic uncertainty is likely to drive continued use of on demand staffing.
True Blue and Command Center are true direct competitors to Labor Smart in the on demand segment, in our view, and there are also several other publically traded companies that provide the more traditional temporary staffing services. The shares of many of these companies have enjoyed strong price appreciation year-to-date on the back of economic drivers and the potential impact of the Affordable Care Act. Shares of Kelly Services, Manpower Group, On Assignment and True Blue have appreciated by an average of 25% year-to-date versus +11.3% for the NASDAQ. Conversely, LTNC shares have declined 15%. Labor Smart is in the early stage of development and has yet to convert rapid revenue growth into net profits. However, we believe the company’s footprint and revenue expansion and potential uplisting down the road could be catalysts for the shares. Moreover, as it executes its expansion plans, we expect Labor Smart to benefit from the same exogenous drivers that are helping the overall industry. Our $0.80 price target equates to EV / projected 2014 revenue of 0.5X, which is in-line with True Blue.
In our view, risks include that: the company is highly dependent on founder and CEO Ryan Schadel, is under capitalized, could expand too rapidly, competition could increase, customers could shift towards hiring permanent employees instead of using temporary workers and economic factors could constrain industry growth.
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