On Assignment: A Leader In Global Staffing

Thesis

On Assignment (ASGN) has established itself as a leader in global staffing. Its strong and diversified segments appeal to a wide range of clients, mainly within the United States. With massive government reformation in employment and taxes looming, ASGN is set up to benefit tremendously in the near future. Its experienced management team has increased the share price vastly over the last few years through acquisitions and EBITDA growth. This focused capital allocation strategy bodes well for continued long-term growth. ASGN currently trades for $63.06. Using my personal pro forma that is linked to Capital IQ statistics, I have calculated a one-year target price of $75.20, approximately 20% return. We can expect to see ASGN’s stock price grow relative to the industrials index, with very little downside.

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Company Description

ASGN is a leading global provider of highly skilled professionals in the growing technology, life sciences, digital and creative sectors. It matches workers looking for employment into positions they understand for contract, contract-to-hire and direct hire assignments. ASGN provides services through two segments, the Apex Segment and the Oxford Segment.

Q3 2017 Earnings Performance

On the Q3 2017 earnings call, ASGN reported revenues and gross margins within the range of past financial estimates, as well as adjusted EBITDA margin and EPS that exceeded the high end of these estimates. Revenues increased by 6% year over year to $667.1 million. Adjusted EBITDA increased to $83.4 million (12.5% of revenue) from $77.8 million (12.4% of revenue) in Q3 2016. Net Income also increased 17% year over year to $34.9 million. While revenues are not growing exceptionally fast, management has found methods to reduce cost and still increase profits. The company has also repaid $286.5 million from the acquisition of Creative Circle, lowering its leverage ratio to 2.08 times. ASGN projects this number to continue to decrease to 1.91 times by the end of Q4 2017. Also, the $150 million share repurchase remains on schedule as the company purchased nearly 1 million shares in Q3 2017. Looking ahead to Q4 2017, ASGN estimates revenues to be between $658 million and $668 million. Adjusted EBITDA is estimated to be between $77.5 million and $80.5 million (approximately 12% of revenue). Finally, net income is estimated to be between $30.9 million and $32.7 million. These figures could lead to a year-over-year growth rate of 6.3% to 7.9%.

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Segment Breakdown

To further get an understanding of ASGN, a segment breakdown and analysis of growth is necessary. The Apex Segment, the larger of the two segments, contributed 77.1% of revenue LTM and a 10.6% EBITDA margin. Business in the Apex Segment serves large markets with a local talent pool, where clients value speed, reliability and price. This segment is comprised of Apex Systems, Apex Life Sciences and Creative Circle. Apex Systems, a 2012 acquisition, provides IT staffing and consulting services for clients across the U.S. and Canada. Apex Life Sciences provides scientific, engineering, clinical research staffing and consultant services for clients across the U.S. and Canada. Creative Circle, a 2015 acquisition, provides creative, marketing, advertising and digital talent to companies in North America.

In Q3 2017, revenues in the Apex Segment were up 9.3% year over year to $517.5 million. Apex Systems, which accounts for 74.8% of the segment’s revenue, reported double-digit revenue growth again. This can be attributed to continued high growth in four of the seven industries it services. Creative Circle grew revenues in the mid-single-digit levels despite management’s belief that it did not meet its expectations. This miss in revenues can be due to a volatility in job order flow for the quarter and the fact that this acquisition is still in the early adoption phase for ASGN. Life Sciences maintained 3.8% growth with the acquisition of StratAcuity. Overall, the Apex Segment is doing well by management’s beliefs and continues to grow in every area and industry.

(Image via 10/26/2017 Investor Presentation)

The smaller Oxford segment contributed 22.9% of revenue LTM and an 8.5% EBITDA margin. Business in the Oxford Segment serves high-end markets that require specialized skills from a national recruiting effort. This segment is comprised of Oxford Global Resource (Oxford Core), CyberCoders and Life Sciences Europe. Oxford Core specializes in recruiting and delivering experienced IT, engineering and regulatory and compliance consultants to clients for temporary assignments. CyberCoders, a 2013 acquisition, specializes in recruiting professionals for permanent placements in engineering, technology, sales, executive, financial, accounting, scientific, legal and operations positions. Life Sciences Europe provides locally based contract and permanent professionals to clients with research and development projects across different scientific industries.

In Q3 2017, the Oxford Segment revenues were down 4% year over year to $149.6 million. Oxford Core revenues, which account for 74.8% of the segment’s revenue, were down mid-single digits year over year, although still beating management’s forecast for the quarter. This decline in revenue is due to the successful completion of two large projects from Q4 2016. Despite these projects, Oxford Core’s revenues are growing and will soon experience the effects of these projects to increase growth rates and profitability. On the other hand, CyberCoders and Life Sciences each experienced positive single-digit growth for the quarter. Overall, the Oxford Segment is performing on track with management’s strategy to improve EBITDA margin. Throughout the end of the year, management will focus on repositioning its go-to marketing strategy and installing a more progressive sales strategy. These activities will be finished in the coming weeks and will start to show physical topline growth in mid-2018.

(Image via 10/26/2017 Investor Presentation)

Industry Outlook

ASGN is, by definition, an industrial company. This industry has performed well throughout the year as you can see by the index from the first page. This also shows that ASGN is following the macro trends throughout the industry and increasing with this index. Beyond this general industry classification, ASGN is a staffing company that provides professional and commercial services. This means that the company’s success relies heavily on factors regarding employment, especially in the U.S. where most of its business is. The U.S. Bureau of Labor Statistics estimates U.S. employment to grow by 9.8 million jobs, or 6.5%, by 2024. Even with an aging workforce and decrease in labor force participation, the job market continues to grow. The Staffing Industry Analysts also expect to see a near $6 billion increase in industry revenues to $144.9 billion by the end of 2017. This includes an increase of 4% in the staffing industry’s largest segment, temporary staffing, and a 6% increase in permanent placement. In the Information Technology segment, the company has beat the staffing industry’s annual growth rate for 15 consecutive quarters. This shows the strength of the company’s position in the industry and its ability to capitalize on emerging market and workforce trends.

(Image via 10/26/2017 Investor Presentation)

Government Regulation

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President Trump and the U.S. government have placed a tremendous focus on growing the economy. So far during his presidency, the stock market has posted all time-highs and shown no signs of slowing down. Two of Trump’s target areas to continue growth are employment and taxes. Specifically in employment, Trump wants U.S. companies to hire domestically rather than overseas. He wants to limit the number of work visas allowed and inspect companies with 15% of their workforce on visas, especially offshore IT service companies. With this pressure from government, there will be an increase in demand for domestic labor. ASGN’s majority of revenues occur domestically using U.S. citizen employees. Given the reduction of foreign workers, U.S. employees will be paid more, meaning ASGN will have increased bill rates and profits.

Trump also plans on creating major corporate tax reform in the future. His proposal is to reduce the federal corporate income tax rate from 35% to 15-20%. This would have a tremendous impact on ASGN’s net income as it currently pays a high fee in U.S. taxes. The proposal also calls for a mandatory 10% repatriation tax on accumulated foreign earnings. Since ASGN has few of its revenues in foreign markets, this would not have a great impact on its business. In fact, it may move more business back domestically which would call for a need in staffing, turning a negative into a positive for ASGN. Although these are all proposals at the moment requiring votes from Congress, economic reform is bound to happen. Trump and other Republican government officials have three years left to fulfill one of their top campaign promises. With this reformation, ASGN will see a great increase in demand as well as major savings in taxes.

Management

(Image via 10/26/2017 Investor Presentation)

(Image via Bloomberg Terminal)

As seen in the image above, ASGN has a very experienced management team. The whole management team has been together for five years now, and they all have minimum of 15 years of experience in the industry. This chemistry of the team and knowledge of the industry is crucial to maintaining growth for the company. This can be proven by looking at the stock performance before and after 2012 when the team was completed. Before 2012, ASGN’s stock price increased 450% over 20 years. After 2012, ASGN’s stock price has also increased by 450%, but over just five years. It is also worth noting that before 2012 the stock price traded in the single digits with no consistent pattern in growth. After 2012, the stock broke out of single digits and has still maintained a consistent growth trend year to year. Part of this share price increase has been due to management’s acquisition strategy.

It has acquired six different companies since 2007. ASGN’s largest revenue portion of the Apex Segment, Apex Systems, was an acquisition from only five years ago. It plans these acquisitions based on emerging trends in the industry that can prove to be the most lucrative. Right now, Professional and IT Services are management’s focus to foster growth in emerging areas. It is no surprise that these decisions by the management team have translated to an increase in stock price. While it is possible that this trend of growth slows down in the future, a management team like this provides a level of comfort and security for shareholders. It has have knowledge to pick the right future acquisitions that will prove to be lucrative for ASGN.

(Image via 10/26/2017 Investor Presentation)

Competition

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ASGN competes with a wide range of companies that offer similar services to theirs. Each of its business segments has unique competitors on national and international levels. These categories listed above represent the company’s dominance in the industry over the past year. Particularly, sales growth and EBITDA margins are close to double that of its competitors. These key metrics give a basis of comparison for ASGN showing that its operations this year have been quite successful. Although a 1.11% CAPEX/Sales ratio seems low, it is not for staffing companies. It is one of the top capital expenditure spenders in its industry which shows its forward thinking strategy to invest in future projects. ASGN is able to do so well against its competitors because of its industry awareness and ability to meet its clients’ needs. Some of the main competitive factors for staffing companies are speed, quality of candidates and retention of clients. ASGN’s 155 branch offices give it the ability to deploy clients in a vast range of locations, depending on the client. It focuses on the appropriateness of the employee assigned to the client to ensure the best match. This creates relationships with its clients that give ASGN a competitive advantage over the rest of the staffing industry.

Conclusion

ASGN has a relatively low downside over the next year. I expect the stock price to continue to grow, based on the trend of its segments and the industries it is involved in. With the imminent help of government reformation, the company will be in high demand over the next few years. Management’s experience and ability to allocate capital in the proper way reaffirms my belief that we should buy this stock. Investors should buy this stock now and can expect to see positive return over the end of this year and likely beyond.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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