When you're good, you're good -- and with the economy growing nicely and employers adding to their ranks, times are very good at Administaff (NYSE:ASF).
Like Gevity (NASDAQ:GVHR), Administaff provides companies with an outsourced HR solution. Customers can focus on core operations while recruiting and administrative HR tasks are handled by another expert for a fee. Paychex (NYSE:PAYX) and Automatic Data Processing (NYSE:ADP) offer competing services as well.
For the quarter, Administaff saw strong margin increases and a 180% rise in diluted earnings per share. That amazing jump was driven by increases in new sales, client retention, growth at existing clients, and solid expense management. Administaff also boasts a solid balance sheet that is flush with cash; the company recently began paying a dividend that I would not be surprised to see increase.
While this quarter was particularly strong for Administaff, things have going well for the company since 2003, when the company changed its revenue and billing model to more accurately reflect how clients use its resources. The company has focused on its current markets rather than adding new offices, which has kept cash flow solid and expansion-related expenses contained. This won't last forever, though.
Administaff does have geographic risk in Houston and throughout the state of Texas. Any material slowdown in the area could spell trouble for the company. While Administaff's current environment is fairly favorable, investors should be careful not to project the last few quarters' results too far into the future. Through its co-employer relationship with clients, Administaff is also responsible for workers-compensation costs and health-care claims. Given that this is the company's line of business, I would expect they can manage these areas well, but as Motley Fool Stock Advisor pick Costco (NASDAQ:COST) proved in California, legislation can always wreak havoc.
While growth is currently hot, I think investors should build out a reasonable free cash flow model that contains moderate advances in employment and slightly larger capital expenditures over the next few years. Potential investors should also pay close attention to how well the company is retaining clients. The company's recent improvement on that front is a very positive sign, because it will lead to stable cash flows and allow the company to manage its expansion effectively.
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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
