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Economy Gains 288,000 Jobs... Will Korn/Ferry or Kelly Services Benefit?

Last week, the market surged on news that the economy gained 288,000 jobs in June. The number beat analyst expectations, as the unemployment rate dropped to 6.1%, the lowest figure since September 2008. Naturally, this news would seem to benefit any stock that's related to employment. Two of my favorite staffing stocks, Korn/Ferry (NYSE: KFY  )  and Kelly Services (NASDAQ: KELYA  ) , are headed in different directions thanks to this trend. Here's why. 

Source: Korn/Ferry.

This job market is fueling Korn/Ferry
Over the past year a few things have changed in the job market. As last week's jobs report showed, professional services and management positions have been on the rise. Along with unemployment rates dropping, America is hiring executives again. In ManpowerGroup's most recent talent shortage survey, management and executive positions were ranked as the sixth hardest to fill globally. The last two years, this category has cracked the top ten list. Yet in 2008 and 2009, when the economy was spiraling, they didn't make the cut. 

When we were in recession, management positions were thinned out while core technical staff were retained. Now, management is being beefed up, which plays right into Korn/Ferry's hands. The company is internationally known for headhunting top executive talent; when it does, it collects large, flat fees for its trouble. Unlike temporary staffing providers, Korn/Ferry's service is not a commodity. Korn/Ferry finds and places the world's most in-demand talent, even filling positions in niche fields, from airline CEOs to NFL head coaches. 

It's important to remember that not all employment stocks are the same. Korn/Ferry doesn't manage any employees (a la a temp business) and simply recruits and places candidates for a flat fee. This can be a less risky business than temporary staffing, because temporary staffing firms have to pay temp employees long before they're paid. Korn/Ferry's only overhead is its internal recruitment and talent consulting staff. The only risk to its business is that it needs high demand. When the hardest-to-fill positions become even harder to fill, this stock cooks. Korn/Ferry just reported a 34% quarterly jump in earnings, which follows last quarter's record fee revenue. The past two quarters have also shown double-digit growth in Korn/Ferry's talent consulting and recruitment process outsourcing, or RPO, groups, which help businesses improve their recruitment and retention processes. The stock is trading near a 52-week high, but still only trades at a P/E around 20.

Source: Kelly Services.

Kelly is down, but not out
Kelly Services can seem a bit mystifying at a glance. Between 2010 and 2013, when the employment market was pretty unstable, the company did exceptionally well. At one point, Kelly enjoyed over 20 straight quarters of earnings beats. Now that the job market seems to be on the mend, Kelly is struggling, which seems backward for a staffing stock. In the first quarter of 2014, Kelly's earnings sank dramatically to $0.07 compared to $0.34 per share in the first quarter of 2013.

There are a few reasons for this. The first is that the bulk of Kelly's revenues still come from temporary staffing, which is a business that does surprisingly well during unstable times. When the economy is on shaky ground, employers are hesitant to commit to employees long-term and prefer to utilize temporary services. When the economy improves, rising gasoline prices and higher wages can lead to higher turnover for low-skilled temporary roles. This is the nature of the beast for low-skilled temporary labor; it's a fickle business. 

The good news is that Kelly's management is aware of this, and they're transitioning into higher-skilled offerings in Engineering and Legal, as well as consulting services (similar to Korn/Ferry's). This obviously won't happen overnight. 

After the rough quarter, CEO Carl Camden said, "It's clear we are making progress on adjusting our operating models and focusing on higher-margin growth -- and we're delivering a profit while investing aggressively in Kelly's long-term success." Mentioning the investment in newer services, Camden continued: "Kelly is taking the necessary steps to secure our position in the specialty staffing and outsourcing and consulting markets. In particular, we continue to see strong demand and revenue growth in the talent supply chain management approach delivered through our OCG segment." 

While a tough quarter is never preferred, it's refreshing that Kelly's management is targeting a better business model. Even more refreshing are the areas Kelly is moving into: higher-margin staffing and consulting services that should lead to more stability in earnings. Today, Kelly trades at only 14 times earnings. 

Two stocks, two stories
Today's market benefits Korn/Ferry more than Kelly, and Kelly's stock is appropriately cheaper. With that in mind, Korn/Ferry should perform better in the near term but either stock could be a good investment right here. 

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Adem Tahiri

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9/2/2015 10:53 AM
KELYA $14.23 Up +0.05 +0.35%
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KFY $33.47 Up +0.15 +0.45%
Korn/Ferry Interna… CAPS Rating: *****