Wednesday, October 21, 2009

Manpower lacking, well, power... (MAN)

The news here is not so much that staffing giant Manpower(MAN) reported dismal results, but more that the company still has a $4billion market value?!?! It's been falling as I write this.

With unemployment increasing worldwide (which is key, as Manpower has operations all over the place), it's pretty amazing to take a look at Manpower's stock price during the last 2 years years. It's down today, but still closer to highs than its lows.

After years of following this company, I still find its geographic "footprint" to be interesting. Revenue from French operations accounts for 31% of the company total, while North America contributes just 10%. In Europe, where firms face hurdles trying to lay off employees, companies instead shutter factories for weeks or months, hurting Manpower's temporary staffing business. With layoffs they could at least make money helping jobseekers find work elsewhere.

Notable on the conference call was a question about whether the company was "walking away from business"-->> meaning were they passing on contracts where the terms were unattractive or even unprofitable. Managements usually respond to these questions in a "proud" tone if you will, pleased to tell investors that they turn down low-or-negative margin business. In Manpower's case, it feels more like a desperate industry attracting lowball bids, which is not good at all. Management said that an example would be a current client offering an extra $5mil contract on top of the current business, but at awful margins. Manpower is turning this down, but obviously a hungry competitor is taking their place -->> there's a good chance in many of these instances that this new competitor will take the "base" contract as well.

Also concerning is management's lack aggressiveness on cost controls. Faced with trying economic environments, some companies cut costs with a laser-like focus, intent on providing cash flow to investors. Manpower seems to be acting more in a reactionary stance, saying they're "waiting for improvement." But will it come to this industry, which could be facing long-term pricing declines?

Manpower has interest expenses of $29million per quarter, and is only earning (on a cash flow basis) about $66million to cover that quarterly -->>not very healthy if you ask me, but manageable if it doesn't get worse.

On to the valuation, which is a horror flick in and of itself. December 2010 earnings per share are estimated at 1.22, for a price-to-earnings of 43. That is exorbitant, but I'll give them leeway as we're in a depressed environment. Even if I look around and try to "back into" this share price (trying to justify it), it's tough. Earnings at their PEAK were 1.81 per share, so we're trading today at 28times that number. Still too expensive. Free Cash Flow is substantially higher at Manpower due to big depreciation charges, and it peaked at (generously) $485million, which would be an 11.6% FCFY (Free Cash Flow Yield) on today's market value. That's "would be," because I don't expect the company to ever earn that again. This stock is WAY ahead of itself, and despite the 13% drop today it could have further to fall.

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