Summary
- HireQuest continues to be one of our more consistent winners in the portfolio.
- HQI stock is up over 40% in 2023 and is up 12% since year-end 2021.
- We believe the market mistook HQI's $13.5mm dollar acquisition of MRINetwork.
- We are salivating at the potential for this acquisition’s profitability as we expect a substantial marginal contribution to our pre-acquisition operating income/EBITDA estimates of $22mm/$29mm in 2023.
The following segment was excerpted from this fund letter .
HireQuest ( HQI )
HireQuest continues to be one of our more consistent winners in the portfolio. While the stock was down 20% in 2022, mostly via a rough, negative 12% December 2022, the stock is up over 40% in 2023 and is up 12% since year-end 2021. The company continued to fire on all cylinders in 2022 with revenues up 73% for the trailing twelve months that ended on September 30 th , 2022, and 67% for nine months of 2022.
More importantly its Franchise Royalties, which account for most of its profit, increased almost 40% for those nine months with 32% organic growth. During that same period, gross profit grew by 50% and EBITDA over 87% continuing to show the operating leverage inherent in its business model.
As a reminder HireQuest, a now $300mm market cap company, is a consolidator in the staffing industry, acquiring $34mm worth of businesses in 2021 and $15mm in the first nine months of 2022. Led by its impressive CEO Rick Hermans, the company buys owned locations, sells them via franchise agreements to the branch managers, and collects an approximately 6% franchise fee of the subsequent revenues. This model has been incredibly successful due to providing the right entrepreneurial incentives to hereto salaried branch managers that now have an opportunity to earn six-figure incomes.
Though of course a 3.4% unemployment rate and a tight labor market surely help drive system-wide sales to a $500mm run rate. This is why we believe in November 2022 when the company announced a $13.5mm dollar acquisition of MRINetwork, the third-largest executive recruiting network in the world, the market mistook it as another small tuck-in acquisition. At first glance, the target company generated $1.9mm in EBITDA so a 6.5x multiple seemed like a normal run-of-the-mill price which should contribute to 2023 earnings.
However, what is hidden behind the $1.9mm EBITDA number is that MRINetwork has 232 office locations and a close to $300mm system wide sales run rate or less than a 1% operating margin. If the past is anything to go by, this acquisition can generate up to $18mm in 100% gross profit revenue in 2023, on top of the current $30mm franchise royalty run rate. We are salivating at the potential for this acquisition’s profitability as we expect a substantial marginal contribution to our pre-acquisition operating income/EBITDA estimates of $22mm/$29mm in 2023.
As we mentioned earlier, while we are contrarians on the path of inflation and interest rates, we are also contrarians on the path of economic growth in the United States and believe that the resilience of the domestic economy can continue to produce low unemployment rates, relative to historical averages, for at least a few more years.
As such we expect continued strong organic growth and acquisition opportunities to grow the company’s EBITDA to over $50mm toward the end of 2024 where an 8x to 10x multiple, which we believe is appropriate given the franchise economics of this business model should result in a near term price target of $36.00. Of course we intend to continue holding this investment, other than risk management adjustments, until Rick Hermans eventually sells the company.
Legal DisclosureThe Partnership’s performance is based on operations during a period of general market growth and extraordinary market volatility during part of the period, and is not necessarily indicative of results the Partnership may achieve in the future. In addition, the results are based on the periods as a whole, but results for individual months or quarters within each period have been more favorable or less favorable than the average, as the case may be. The foregoing data have been prepared by the General Partner and have not been compiled, reviewed or audited by an independent accountant and non-year end results are subject to adjustment. The results portrayed are for an investor since inception in the Partnership and the results reflect the reinvestment of dividends and other earnings and the deduction of costs, the management fees charged to the Partnership and a pro forma reduction of the General Partner’s special profit allocation, if applicable. The General Partner believes that the comparison of Partnership performance to any single market index is inappropriate. The Partnership’s portfolio may contain options and other derivative securities, fixed income investments, may include short sales of securities and margin trading and is not as diversified as the indices, shown. The Standard & Poor's 500 Index contains 500 industrial, transportation, utility and financial companies and is generally representative of the large capitalization US stock market. The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index and is generally representative of the small capitalization U.S. stock market. The Russell Microcap Index is comprised of the smallest 1,000 securities in the Russell 2000 Index plus the next 1,000 securities (traded on national exchanges). The Russell Microcap is generally representative of the microcap segment of the U.S. stock market. All of the indices are unmanaged, market weighted and reflect the reinvestment of dividends. Due to the differences among the Partnership’s portfolio and the performance of the equity market indices shown above, however, the General Partner cautions potential investors that no such index is directly comparable to the investment strategy of the Partnership. While the General Partner believes that to date the Partnership has been managed with an investment philosophy and methodology similar to that described in the Partnership’s Offering Circular and to that which will be used to manage the Partnership in the future, future investments will be made under different economic conditions and in different securities. Further, the performance discussed herein does not reflect the General Partner’s performance in all different economic cycles. It should not be assumed that investors will experience returns in the future, if any, comparable to those discussed above. The information given above is historic and should not be taken as any indication of future performance. It should not be assumed that recommendations made in the future will be profitable, or will equal, the performance of the securities discussed in this material. Upon request, the General Partner will provide to you a list of all the recommendations made by it within the past year. This document is not intended as and does not constitute an offer to sell any securities to any person or a solicitation of any person of any offer to purchase any securities. Such an offer or solicitation can only be made by the confidential Offering Circular of the Partnership. This information omits most of the information material to a decision whether to invest in the Partnership. No person should rely on any information in this document, but should rely exclusively on the Offering Circular in considering whether to invest in the Partnership. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Artko Capital - HireQuest: Salivating At MRINetwork's Profitability Potential