2023-03-27 21:37:37 ET
Summary
- Despite the positive shift in MAN's business mix and the secular trend of rising labor cost flexibility, current macro risks may slow the near-term growth.
- I expect France, Germany, and Italy to all perform better than the United States in the near term.
- The company is positioned well to successfully implement its global digitalization strategy, which should have a positive impact on margins beginning in 2024.
Summary
The cyclical nature of ManpowerGroup ( MAN ) is complemented by the secular trend of rising labor cost flexibility and a positive shift in the company's business mix. Although I believe that the industry's growth prospects will improve over the next few years, I also believe that the current global macro risks will slow MAN's growth in the near term. Where exactly we are in the current economic cycle is probably the biggest question mark. The labor market is still tight, but the chances of a recession have increased, putting MAN in a difficult position, in my opinion. In particular, it appears to me (based on my observations and conversations amongst my friends) that businesses are not dismissing or laying off their permanent or full-time workers, which puts pressure on the demand for temporary help workers (i.e., tight labour market). Instead, they're making an effort to keep hold of their current staff, which makes sense given that they don't have to go through the trouble of recruiting and training new people. But generally speaking, I expect economic activity to decrease due to the current high interest rate environment. MAN guided 1Q23 US revenue would fall more sharply year-over-year than 4Q22 revenue, which fell by 5%. That's a pretty solid sign of how things are going right now. Geographical exposure wise, while the United States is expected to see a decline in volume, France is expected to see a slight increase compared to the same period last year. Improvements in the supply chain should also help MAN's performance in Germany, a smaller region where a disproportionately high amount of business is tied to the auto sector (the highest of any country). In my opinion, the best time to invest in a staffing stock is during a recession, as this is when companies can most benefit from the services of staffing agencies.
France/Italy
France is MAN's largest market, and with the government's help, I expect it to continue performing better than the United States. For instance, the French government cut the country's business tax rate, which I predict will have a positive impact on MAN's earnings per share. The final piece of the French business tax reform has not yet taken effect, so earnings per share should increase even more. I also think it's encouraging that MAN's France operations still aren't back to pre-pandemic staffing levels. It would appear, at first glance, that progress has been slow. This acceleration, if achieved in the midst of this weak economy, should put a positive spin to the stock’s narrative. We can already see the underlying parts helping to bridge to this growth . For instance, the automotive industry is showing signs of revival. On a related note, I don't think MAN's business will be significantly impacted by the ongoing protests in France over pension reform, as people will still be able to get to work via public transportation. Regarding Italy, although it is a smaller market for MAN compared to France, I think that it has the potential for long-term growth for MAN, as there is a trend towards the hiring of more temporary workers.
Strategy
In addition to growth trends, I'm optimistic that MAN is positioned well to successfully implement its global digitalization strategy. In 2016, roughly 7 years ago, management first mentioned the word digitization in its transcript. I believe that the bulk of this transition is complete, and that once it emerges from this challenging period, we should continue to see structurally higher through-cycle margins as it completes the transition. Specifically, I believe greater recruiter productivity and a gradual reduction in spending on the technology investment should have a positive impact on margins beginning in 2024. I find it remarkable that MAN has undertaken such a massive platform change, and I believe it gives a significant advantage over rivals still using legacy software.
MAN's DDI (Diversification, Digitization, and Innovation) strategy is not solely focused on digital transformation. I am also optimistic about MAN's diversification strategy, which entails sending more highly trained professionals and commercial workers to work on increasingly complex projects. In order to provide some perspective on the overall effectiveness of this strategy. Higher-value services such as Experis and Talent Solutions contributed 43% of gross profit dollars in 2022, while the Manpower brand and commercial staffing contributed 57%. In contrast, Manpower's commercial staffing and brand name revenue contributed to 65% of the company's total revenue ten years ago. This is proof that management can execute as planned and should this trajectory continue, we should continue to see a positive improvement in margin due to a better mix.
Margin
As MAN continues to pull out of contracts with lower margins in certain regions, I expect margin to improve there as well. The United Kingdom, MAN's fourth largest market, is one place where the company has actively shed lower-margin contracts (3Q22 earnings transcript) in favor of higher-skilled, higher-margin assignments. The problem with this approach is that it slows top-line growth while increasing margin percentage, which can throw off investors who prefer to extrapolate growth in a linear fashion. Having said that, I am an advocate for steady, profitable growth over the long term. As such, I advocate management focus on improving its margins. All of this leads me to believe that MAN will achieve its 4.5-5.0% EBITA margin goal within the medium term. Mix shift into higher-skilled assignments and technology enablement, in particular, should help MAN reach its goals. Importantly, MAN doesn't have to achieve the same level of revenue it did in the past to reach the same margin given the current higher margin profile.
Conclusion
While MAN stock is well-positioned to benefit from the secular trend of rising labor cost flexibility and a positive shift in its business mix, it currently faces challenges from the global macro risks that may slow down its growth in the near term. The company's growth prospects are dependent on the state of the global economy, which is uncertain due to the ongoing pandemic and high-interest rate environment. However, I believe that the company's DDI strategy, coupled with its focus on higher-skilled assignments and technology enablement, will enable it to achieve its 4.5-5.0% EBITA margin goal within the medium term. Additionally, the company's performance in France, its largest market, and improvements in the supply chain in Germany are expected to help MAN's overall performance. Overall, while the current economic climate poses challenges for MAN, I believe that the company's long-term prospects are positive, and it remains a good investment for those looking for steady, profitable growth.
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ManpowerGroup: Expect Margins To Continue Improving