1 Company Fighting an Uphill Battle

Based upon occupation-specific data from the U.S. Bureau of Labor Statistics (BLS), On Assignment (NYSE: ASGN  ) , a temporary staffing company, is poised for modest growth over the next two years.  However, investors can find better value elsewhere in the staffing industry.  

On Assignment, and the temporary staffing industry as a whole, is benefiting from a nationwide surge in temp workers, which has been fueled by the global recession and a prolonged weak recovery. As of June 2013, there were 2.68 million temp jobs in the U.S., a year-over-year increase of 7.46%. 

According to analysis relied on by On Assignment, professional staffing industry revenue grew from $44 billion in 2010, to $53 billion in 2012, a 20.4% increase during the height of the global recession. The growth in industry revenue and number of temp workers, coupled with an aging U.S. population and implementation of the Affordable Care Act, lead On Assignment to believe its various segments will grow between 6%-10% over the latter portion of 2013. 

However, the occupation-specific employment data from the BLS suggests substantially lower growth in the sectors that matter most to On Assignment. The primary revenue source for the company is the Information Technology sector, as its Apex and Oxford divisions generated $1.23 billion in the last 12 months, which represents 80% of its business.

Apex and Oxford meet temp staffing needs for professions such as programming specialists, network engineers, application developers, social and mobile app developers, and help desk support.  On Assignment is projecting 8% growth for its Apex and Oxford segments. However, the BLS data shows that the "Computer Occupations" field, which encompasses all of the aforementioned IT positions, will grow by just over 2% annually through 2020. 

APEX/Oxford-IT Sector

2013

2014

2015

Revenue

$1,231.0

$1,258.2

$1,286.0

#s On Assignment

8600

8790

8984

Revenue per Assignment

$0.14

$0.14

$0.14

EBITDA

$130.5

$140.9

$144.0

Source: U.S. Bureau of Labor Statistics

In 2013, the company plans to have 8,600 employees "On Assignment" in its Apex/Oxford divisions.  By knowing the number of contracted employees, revenue per assignment can be calculated, and allow for projection of future revenue as the IT sector grows.  On Assignment reported an EBITDA margin of 10.6% in the first two quarters of 2013, which was used to forecast EBITDA.

On Assignment is also engaged in the Life Sciences, Physician, and Healthcare professional staffing segments, with Physician staffing being managed by its Vista division.  Life Sciences is comprised of professions such as chemists, biologists, food scientists, and other skilled scientific positions. BLS data forecasts the "Life Scientists" occupational field to grow by 2% annually through 2020.  With regard to the Physician staffing and general Healthcare segments, BLS forecasts 2.44% and 2.59% annual growth respectively through 2020.

Life Sciences

2013

2014

2015

Revenue

$163.0

$166.3

$169.7

#s On Assignment

2300

2347

2395

Revenue Per Assignment

$0.07

$0.07

$0.07

EBITDA

$17.3

$18.6

$19.0

Vista (Physician Staffing)

     

Revenue

$106.0

$108.6

$111.2

#s On Assignment

280

287

294

Revenue Per Assignment

$0.38

$0.38

$0.38

EBITDA

$11.2

$12.2

$12.5

Healthcare

     

Revenue

$61.0

$62.6

$64.2

#s On Assignment

900

923

947

Revenue Per Assignment

$0.07

$0.07

$0.07

EBITDA

$6.5

$7.0

$7.2

Source: U.S. Bureau of Labor Statistics

Cumulatively, the modest projected growth in these occupation-specific employment sectors leads to a slight increase in EBITDA, from $165.5, to $172.9 million, which represents just 4.49% earnings growth over the next two years.  Such tepid growth supports a ticker price of $35 a share.

Obviously, there are opportunities for On Assignment to achieve higher earnings growth than the conservative approach taken above. On the macroeconomic level, the implementation of the Affordable Care Act, or ACA, in 2014, is expected to increase IT workload, as specialists will be needed to operate and maintain the insurance exchanges. In addition, many companies are expected to outsource ACA requirements and regulation management to staffing companies that are well-versed in the law.  Lastly, expected physician shortages over the next 15 years, and a growing proportion of part-time physicians, could increase demand for temp staffing.

The company could grow revenue per assignment if billing rates were to increase, which is plausible considering the growing demand for IT services, and rapid rate of technological change. The company could also decrease SG&A expenses and, thus, grow its EBITDA margin. In the second quarter of 2012, On Assignment's EBITDA margin was 11.2%, which was 0.6% higher than the current year. Using last year's EBITDA margin in the above growth model would result in stronger EBITDA growth of 10.41%.

For the best value in the staffing sector, investors should look to Robert Half International (NYSE: RHI  ) , which generates 2.5 times the revenue, and nearly four times the income.  Furthermore, RHI has a market capitalization of $5.43 billion, which is three times higher than On Assignment's valuation of $1.77 billion.

There is a concern that the growth rates of 6%-10% used by On Assignment are based on a three-year period from 2010 to 2012. This timeframe featured elevated temp employment due to the recession and its lasting effects. For comparison, annual growth in the staffing industry in the five-year period from 2007-2012 was -1.2%. IBIS World projects industry growth of 2.7% through 2017, which is much more in line with the conservative methodology taken above.

While there are obvious opportunities for On Assignment and the professional staffing industry at large, there is also substantial risk that lends support to a conservative growth forecast. The most impactful risk is the strengthening global economy, which could drive employers away from temps, and toward full-time employees.

There is also continued risk with the implementation of the ACA, as delays and growing public opposition toward the law could hinder plans to expand into this arena. On Assignment is a well-managed company with strong financial performance, but investors should keep expectations in check, as the stock could level off over the next year.

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