JOB - Alluvial Capital - GEE Group: A Nicely Performing Investment Now Sits Just Below Breakeven

Summary

• There was one significant disappointment in GEE Group.
• Hopes were dashed as the company reported essentially zero profit in the fourth quarter after several consecutive quarters of healthy earnings.
• JOB will report to shareholders again in just a few weeks and I expect a much-improved report and some answers on the capital allocation question.

The following segment was excerpted from this fund letter .

GEE Group ( JOB )

I wish I could say that all our holdings graced us with excellent earnings reports this quarter. Unfortunately, there was one significant disappointment in GEE Group, our employment agency turnaround in progress.

Shares ran up to start the fourth quarter as investors grew excited about the company’s recent successes and dirt-cheap valuation. But hopes were dashed as the company reported essentially zero profit in the fourth quarter after several consecutive quarters of healthy earnings. Revenue and gross profits were both fine, still riding high as the tight labor market rolls on. But operating costs ballooned, mostly the result of the company accruing large bonuses and incentive payments at the end of the fiscal year.

I don’t have a problem with the bonuses. In a year of record revenue and profits, the staff deserve their reward. I do have an issue with the company dealing shareholders a nasty shock by cramming these bonuses into a single quarter rather than accruing them throughout the year. The news wasn’t all bad. The company still produced $1 million in free cash flow in the quarter. They indicated they expect another strongly profitable year in fiscal 2023. But the damage is done, and what was formerly a nicely performing investment now sits just below breakeven.

I can excuse a disappointing earnings report, even if it was avoidable. We are investing for what our companies will do in the years ahead, not the next quarter. What concerns me much more is GEE Group’s failure to commit publicly to a capital allocation framework. The company has been accumulating cash far in excess of its operating needs for several quarters now, yet it has not chosen to reward shareholders with a return of capital or increase its earnings power with acquisitions or internal initiatives.

Back in December, the CEO promised the board would meet to consider implementing a share buyback once earnings were “digested” by the market. He also promised “good things” ahead. We’re still waiting. GEE Group will report to shareholders again in just a few weeks. I expect a much-improved report and some answers on the capital allocation question. These answers will determine whether GEE Group maintains its place in our portfolio.

With so many other great opportunities out there, there’s no room for a company that repeatedly fails to deliver on its promises, no matter how optically cheap its shares may be.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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