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13:51 el 28 mayo 2015

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Nuevo artículo de Georg Von Wys

Profit growth, job growth and stock prices: a case study in temporary employment

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The four largest internationally active employment agencies, of which we own three, are an interesting case study in how everyone benefits when a company pursues the profit motive. Kelly Sevices, one of these, has not done so very well. But that doesn’t make it a bad investment today .


There are four large, publicly traded temporary employment agencies active worldwide: Adecco, Randstad, Manpower and Kelly Services, and our funds own shares in all of them except Manpower. Kelly, founded 1947 in Detroit, Michigan, is the oldest. A comparison of its performance to that of the other three is an interesting case study in how companies that do not put enough emphasis on profit maximization do a disservice to themselves, their employees and stockholders and with that to the society as a whole.

The following graph compares the EBITA (earnings before interest, tax and amortization of intangibles through acquisitions of companies) margins of Kelly with those of its major listed peers from 1993 (the earliest year for which we can get data electronically) to 2014. The numbers are adjusted for one-time costs such as restructuring expenses and asset write downs. Please bear in mind that this is an industry, in which margins of 4-6% are very good. Never a leader in terms of profitability, Kelly is clearly the laggard since 2000. At an EBITA margin 2013 of 1%, Kelly was at roughly 1/3 the level of its competitors. The comparison is even worse in 2014, but that was an unusual year for Kelly.


Blog eng 26.05.2015


Kelly is clearly less profitable than its three major competitors for two reasons. First, it has placed a high priority on offering steady employment and being a pillar of the community. In other words, the company carries an enormous overhead burden, because it has been very reluctant to cut costs, which in the staffing industry essentially means corporate employees – those that work for their company full time and place the temporary workers or provide the infrastructure necessary for the functioning of the corporation. Indeed, Kelly’s corporate central expenses alone are the size of Manpower’s and larger than Randstad’s, although these companies are about four times the size of Kelly measured by revenues. This alone accounts for about 1%-point of the margin differential to peers. Secondly, Kelly’s strategy has been to concentrate on serving large American corporations wherever they are active worldwide. In return for the enormous volume of business this provides, Kelly has accepted lower prices in the hope of offsetting them with efficiencies. The company has done this well enough in the American field operations, but the foreign subsidiaries, which account for about 25% of sales, are barely profitable even in good years, nota bene without allocating the corporate costs to the operating units.

By contrast, Kelly’s European competitors have been much more ruthless in cutting jobs when the need arose, especially after mergers but also during market downturns. Their systems are designed to reward even low level managers for achieving profits, whether that is in times of growth, when investments are required, or during recessions, when costs need to be cut. Moreover, they have found efficient ways to serve high volume customers. An example is Randstad’s in-house concept, in which a dedicated team serves the customer right from its own premises instead of a typical branch office, simplifying communication, reducing overhead costs and tying the customer closer to Randstad. Adecco and Randstad thus have much higher profit margins. Manpower is something in between. It had been managed poorly, leading to poor pricing decisions in some markets and a lack of cost discipline, but these mistakes have been corrected in the last years, and it, too, has been reducing headcount.

High profits allow an enterprise to grow (if, of course, they are real and result in corresponding cash flows) by enabling investments. These can go either into organic growth opportunities, which in this industry means renting new locations, hiring people to recruit and place temporary staff and buying software to make the process more efficient, or they can go into acquisitions, opening access to new markets or strengthening positions in existing ones.

The benefits of high profit margins are apparent in the statistics in the table below. In 1993 Manpower, then the largest, was roughly twice as big as Randstad, the smallest of the group and essentially focused on the Netherlands. Adecco and Kelly Services were in between and roughly equal in size. But 21 years later, thanks to acquisitions and comparatively high rates of organic growth, Adecco and Randstad had increased their revenues 13- and 14-fold, nearly twice as much as Manpower, and relegated it to third place. In this time Kelly, always starved for cash, did not even triple its revenues. Adecco is now 4.8 times larger.

As one might expect, the stock prices of these four companies reflect their revenue and margin performance. The shares of Randstad have done best, after it successfully expanded internationally, followed by Adecco and Manpower. Kelly’s stock has essentially stagnated, leaving it miles behind even the relative laggard Manpower.

It is worth pointing out that this share price performance has not come at the expense of the workers. The number of corporate employees has risen roughly half as fast as revenues at the two European firms. Essentially this reflects the productivity gains the industry has achieved, largely thanks to better software. The two Americans benefitted from the same effect, but as inferior operators to a lesser extent. Thanks to their outstanding growth, Adecco has nearly six times as many corporate employees and Randstad nearly eight times as 21 years ago, while Kelly has not even doubled this number.


Table:Long term company performance19932014Change
Revenues (USD million)2’10626’7021268%
Corporate employees5’06731’576623%
Share total return  668%
Kelly Services   
Revenues (USD million)1’955 5’563285%
Employees4’300 8’300193%
Share total return  -5%
Revenues (USD million)3’18020’763653%
Share total return  373%
Revenues (USD million)1’62723’0311415%
Share total return  1225%


You may at this point be wondering why 3.0% of the Classic Global Equity Fund is invested in Kelly, and why we would own it in the Classic Value Equity Fund if its market capitalization were large enough (at least CHF 2 billion). The answer, quite simply, is that the stock price more than discounts Kelly’s problems. The company has boxed itself into a corner strategically. It depends on large clients, and these require an international presence, but Kelly is too weak to grow its non-US operations to a scale that would allow them to be consistently profitable. Nevertheless, the company does have strengths – an excellent brand name, a strong position in US mass temping, and some innovative ideas. Even though Kelly recently reduced the size of its large headquarters and is slowly whittling down its international presence, the cost cutting potential remains huge for an acquirer who is willing to eliminate the headquarters and who can handle the international business in its own network. We hope that the controlling shareholders soon realize that their only realistic option is to put the company up for sale. That should ensure the growth of the healthy assets, create jobs in the long term and provide us with a good stock return.

–Georg von Wys

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