NSP - Insperity Faces Cost Increase Pass-Through Test

2023-09-29 14:21:55 ET

Summary

• Insperity, Inc. provides outsourced HR and human capital management services to small and medium businesses.
• The company has experienced higher healthcare costs and needs to pass them on to clients.
• The stock appears currently fully valued, and the company's ability to pass on price increases remains uncertain.
• I remain Neutral [Hold] on Insperity, Inc. shares for now.

A Quick Take On Insperity

Insperity, Inc. ( NSP ) provides a range of outsourced HR and human capital management services to small and medium businesses.

I previously wrote about NSP with a Hold outlook.

The firm has experienced much higher healthcare costs that it now must pass through to clients.

Until we see the results of those pricing adjustments in a challenging macroeconomic environment, I remain Neutral [Hold] on NSP.

Insperity Overview And Market

Texas-based Insperity was founded in 1986 to provide small and medium-sized businesses with various outsourced human resources and related human capital management business services.

Management is headed by co-founder, Chairman and CEO Paul Sarvadi, who has served as the president of the National Association of Professional Employer Organizations.

The firm's main offerings include the following:

• Consulting.

• Benefits Administration.

• Payroll Services.

• Employee Training.

• Recruiting and Staffing.

• Technology Solutions.

NSP seeks customers through direct sales and marketing activities and through partner referrals and online marketing.

According to a 2023 market research report by Grand View Research, the global market for human resource management was estimated at $21.7 billion in 2022 and is forecast to reach $56.5 billion by 2030.

This represents a forecast CAGR (Compound Annual Growth Rate) of 12.7% from 2022 to 2030.

The main drivers for this expected growth are the growing use of automated and digitized HR operations to improve operational efficiencies and increase flexibility in various economic environments.

The chart here shows the estimated growth trajectory of the U.S. human resource management market:

Major competitive or other industry participants include:

• Accenture.

• ADP.

• Cezanne HR.

• Ceridian HCM.

• Kronos.

• Mercer.

• PwC.

• Cegid.

• UKG.

• Workday.

Insperity's Recent Financial Trends

Total revenue by quarter has continued to trend higher; Operating income by quarter has dropped sequentially in the most recent quarter:

Gross profit margin by quarter has fallen in Q2 2023; Selling and G&A expenses as a percentage of total revenue by quarter have varied within a narrow range:

Earnings per share (Diluted) dropped sharply in Q2 2023:

(All data in the above charts is GAAP).

In the past 12 months, NSP's stock price has fallen 5.78% vs. that of the iShares Expanded Technology-Software ETF's ( IGV ) rise of 36.13%:

For balance sheet results, the firm ended the quarter with $616.1 million in cash, equivalents and short-term investments and $369.4 million in total debt, none of which was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was an impressive $220.0 million, during which capital expenditures were $35.3 million. The company paid $51.1 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Insperity

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:

Based on the DCF, the firm's shares would be valued at approximately $95.67 versus the current price of $97.66, indicating they are potentially currently fully valued.

Commentary On Insperity

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023's results, management's prepared remarks highlighted continued revenue growth.

However, leadership is now forecasting a benefit cost trend of 7% to 8.5% for 2023, versus a previous estimate of 5%.

In response, the company intends to adjust its pricing to accommodate this higher cost trend.

Total revenue for Q2 2023 rose 10.7% year-over-year, while gross profit fell by 2.6% due to 'higher-than-expected healthcare costs driven primarily by large claim activity and pharmacy costs.'

Management did not disclose any client or revenue retention rate metrics.

Selling and G&A expenses as a percentage of revenue decreased by 0.1% YoY, but operating income dropped by a whopping 67.4% due in part to gross profit drop from higher healthcare costs.

The company's financial position appears to be strong, with ample liquidity, some long-term debt and impressive free cash flow generation.

Looking ahead, consensus top line revenue growth is estimated by 9.4% for the full year of 2023.

If achieved, this would represent a substantial drop in revenue growth rate versus 2022's growth rate of 19.4% over 2021.

In the past twelve months, the firm's EV/EBITDA valuation multiple has fallen 21%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include its ability to pass through price increases to clients for its higher healthcare costs.

However, given a challenging macroeconomic backdrop, time will tell how much success management has in this critical area.

Until we see the results of its pricing changes on NSP's operating income, I'm Neutral [Hold] on Insperity, Inc. stock.

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