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Industry Analysis: Human Resources
Largely cyclical and fragmented, the Human Resources Industry encompasses a diverse group of companies providing a range of job-placement and workforce solutions to corporations in various markets. Although company-specific factors influence the operating performances of these service providers, macroeconomic and labor-market conditions also play an important role. The competitive landscape can impact business fundamentals, too. It is these elements that often cause stock prices in the Human Resources Industry to fluctuate. Our reports on companies in this sector conform to the standard Value Line industrial page layout.
Keeping an eye on the national and global economies is crucial when contemplating an investment in the Human Resources Industry. Economic conditions can significantly affect the fortune of a staffing firm. While there is a plethora of labor-market statistics that offers insight to the state of the industry, seasoned observers pay special attention to the unemployment rate.
Unemployment, considered a “lagging indicator,” as its function is essentially to confirm patterns in the economy, often provides clues to the direction of the staffing market. It is important to note the correlation between unemployment and gross domestic product (GDP) in a business cycle, which can be best described as an inverse relationship. Whereas, in a business up-cycle, GDP is usually high and unemployment low, during a down-cycle, economic output is typically tepid and unemployment elevated.
When corporate and consumer spending rise for an extended period of time, the jobless rate will fall to, or near, a historical low. This can be a signal to job-placement providers that the business cycle is approaching a peak, and that they need to be prepared for a possible slackening in service demand. Conversely, very high unemployment may indicate a bottom, suggesting substantial future revenue potential. As would be expected, profit margins are fattest late in an economic upswing.
Staffers generate the bulk of their revenues and net profits from traditional employment services. That is, temporary and permanent placements and project assignments, billed based on an hourly rate and fixed prices or fees, respectively. But many companies have also expanded the breadth of service offerings to include nontraditional workforce solutions, such as outsourcing and consulting, as a way to diversify the revenue stream and promote earnings growth. Other diversification efforts include broadening geographic reach and/or offering services within disciplines that are less sensitive to the economic cycle.
Several companies have sought to provide noncore business services to complement their traditional job-placement offerings, and thus provide customers a comprehensive set of solutions. Noncore business services are marketed as a means for corporate clients to reduce their costs and improve efficiency, in accordance with changing dynamics in the economic environment. Examples of these services include the outsourcing of various administrative, human-resource or information-technology functions, and consulting within such areas as benefits, compensation, internal auditing, and risk-management. Although personnel firms don’t require a heavy cash investment to operate, some outsourcing services are a bit more costly, as they necessitate an infrastructure to provide support to clients.
With globalization becoming increasingly popular in the business world, it is not unusual to see a personnel services provider widen its footprint on the international front. Many firms in recent years have targeted emerging markets, where growth opportunities are vast. Although this strategy can help mitigate risk in the event that domestic economic activity slows, widespread weakness can hurt foreign operations, too. Staffers with sizable international exposure are also subject to the vagaries of currency rates, which can take a toll on margins. Those with a well-balanced mix of domestic and foreign business, however, tend to experience limited earnings volatility.
Expanding services to businesses that are resistant to adverse economic changes and are in high demand has become another common theme in the Human Resources Industry. For some companies, this strategy has met with success over the years. They have been better able to cope with the ups and downs of the labor-market cycle. Healthcare, energy and finance are among the niche sectors where the need for professionals is fairly solid most of the time. Notably, the pool of skilled talent is relatively tight. That gives staffers, specializing in these occupations, an advantage over the competition. Also, they are able to command premium pricing for qualified applicants. This is especially true in the traveling nurse market.
Although a variety of company-related and sector-specific issues can impact members of the Human Resources Industry, investors ought to bear in mind that macroeconomic conditions are of paramount importance. Based on the cyclicality of the staffing business, one can generally predict the group’s performance by observing economic and labor-market trends, though forecasting the exact timing of certain events is difficult. In conclusion, it’s best to build a commitment to these equities as a downturn ages, ideally maximizing investment just before conditions in the job market improve. Patient investors can enjoy lengthy upturns. But, as an upturn ages, it’s prudent to periodically take money off the table, cashing in on the gains.