Remember that old saying about how nothing's certain except death and taxes? Well, it's being amended to include human resources outsourcing.
For years, companies like Administaff
An increase in the number of worksite employees and monthly revenues per employee helped its top line. Its operating profit margin held up relative to last year's quarter, but while its operations ran smoothly, Administaff hit a few snags closer to the bottom of its income statement.
Management moved a large portion of its investment portfolio out of tax-exempt money market funds into lower-yielding government-backed securities. That shift led to decreased interest income by $1.2 million compared to the third quarter of 2007. The increase of its income tax rate by nearly 100 basis points to 36% added insult to injury.
Stakeholders should find promise in a few things. Where most companies have long-term debt, Administaff has accrued workers' compensation costs, so it doesn't have interest coverage worries. Additionally, it has more than enough in cash and trade receivables to cover all of its current liabilities. Looking ahead, results from a recently conducted survey of small and medium-sized companies indicate that 75% of owners and managers anticipate increased or unchanged operations growth in 2009.
Some not so good
Administaff's business is cyclical with the broader economy, so several uncontrollable factors can negatively impact its revenues in a difficult economic environment. As it faces competition from Automatic Data Processing
As long as people like Steve Carell's character, Michael Scott, from The Office exist, there will always be a demand for HR outsourcing. Administaff's conservative investment strategy and strong cash position is appealing.
In order to outlast its competitors, Administaff should focus on doing what it does well, but at the same time, stay prepared for a worst-case scenario. As such, its focus for the next year should be on retaining its market share and maintaining its profitability.
Chris Jones does not own shares in any of the companies mentioned. Administaff is a Hidden Gems Pay Dirt pick. Paychex is a Motley Fool Income Investor recommendation. Paychex and Administaff are Motley Fool Inside Value picks. The Motley Fool's disclosure policy still does everything in-house.