Doug Gerlach, editor of Investor Advisory Service, chose Cummins, Inc. (CMI) as a Top Pick last year and the shares rose 36%. Now, he turns to a play on employment services and benefits.
An increasingly complex legal and regulatory environment makes it difficult for small- and medium-sized businesses to provide the range of employee benefits needed to attract and retain talented staff.
See also: Top Picks 2020: Republic Services (RSG)
In response, a type of service business called a Professional Employer Organization (PEO) has emerged to provide outsourced employee benefits and solutions. Insperity Inc. (NSP) was founded in 1986 and has grown to over $4 billion in sales. The company started by focusing on basic PEO services like payroll processing and government compliance.
Over the years Insperity has expanded its services to include a wide variety of human resources and employment functions, including health benefits, 401(k) plans, employee recruiting, performance management, training, and compensation guidance.
Insperity thrives with small firms, generating about three-quarters of its sales from businesses with fewer than 100 employees. In this segment the company can price its services as a percent of the employees’ compensation rather than a flat dollar amount per employee.
The firm’s internet cloud-based software solutions include Workforce Optimization and Workforce Synchronization, the latter supporting medium-sized employers that demand additional services.
Customers value key employee benefits which include healthcare and workers compensation insurance. Insperity can negotiate far better pricing on these benefits because it offers insurers a large pool of aggregate covered lives.
Insperity continues to grow its co-employment model which essentially takes full ownership of a customer’s employees, handling everything from hiring to termination. Employers are growing more comfortable with this model and Insperity earns higher profit margins.
Insperity’s second and third quarters saw slowdowns in sales and signing of new business, and a spike in employee healthcare claims.
The share dropped by a third, as two straight quarters of surprisingly poor performance stunned investors who had come to expect strong and consistent growth from Insperity.
Management subsequently expressed confidence that it had trained enough new sales representatives heading into the critical fourth quarter selling season, and determined that the excess healthcare claims costs it experienced are not expected to repeat.
While aware of the risks, the recent price of $80 represents a fairly cheap P/E of 19. With our long-term EPS growth expectation at 13.0%, we see NSP as a buy up to $92, with the potential for an annual total return of better than 21% through 2024.
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