2023-04-25 08:10:04 ET
Summary
- I am changing my buy rating for MAN to neutral due to the company's weaker-than-expected 1Q23 results and lowered guidance for 2Q23.
- The company's largest market, Europe, is experiencing negative operating trends as customers cut back on hiring due to the weakening macroeconomic environment.
- I believe that declining revenue and EBITA margin could result in a negative perception that could adversely impact the company's stock price in the short term.
Summary
My buy rating for ManpowerGroup ( MAN ) comes to test this 1Q23. Although MAN's adjusted EPS of $1.61 for the 1Q23 was only slightly below expectations, the company's guidance for 2Q23 has caused consensus to lower their earnings guidance for the full year (consensus EPS went from ~1.82 to ~1.62, a 11% revision). When considering other growth metrics, MAN did not fare any better. In 1Q23, organic fx-neutral same day basis [SDB] revenue was down 4% y/y, with the largest decline occurring in the United States (-13% y/y). Fortunately, gross margin held steady in 1Q23 at 18.2%, but I anticipate it will start to decline in the coming quarters as we approach the lap of record high permanent recruitment activity in 2022. The main point of focus for 1Q23 is the forecast that 2Q23 revenues will decrease by 3% in an organic, currency-neutral basis at the middle point of the guided range. This is expected to be similar or slightly higher in the US compared to the decline in revenue experienced in the 1Q23.
While sales in France were above expectations in 1Q23, management noted that the trend was flattening out, if not declining, as the quarter came to a close. As a result, 2Q23 forecasts for France predict a similar dip in income. I am now more worried that the near-term share price will be significantly impacted by the short-term weakness due to the new guidance and persistently high inflation in the Europe region. While I remain optimistic about the company's long-term prospects, it may be prudent to wait for the MAN share price to drop even further before loading up. Therefore, I am changing my rating to neutral for the foreseeable future.
The good
I'd like to highlight the positives that have occurred thus far that lend credence to a long-term bull case before diving into the specific drawbacks. Despite the slowdown and "looming recession," MAN's permanent placement business is booming in many of its largest markets outside the United States, including the United Kingdom, France, Italy, Japan, Spain, and the Nordic countries. This is because these countries' customers are constantly looking to fill permanent positions in strategically important areas of their businesses. The United States and Europe are experiencing difficult times, but positive business trends in Asia, the Middle East, and Latin America are helping to offset this. In particular, the normalization of the global supply chain and China's reopening have both contributed to a brightening economic outlook in Asia and Latin America, both of which bode well for the expansion of temporary staffing needs. The thesis that I presented previously, that MAN has a counter-cyclical nature, is proving to be correct. Increased outplacement volumes due to the economic downturn are a major contributor to the rapid expansion of MAN's counter-cyclical Right Management business within Talent Solutions. Lastly, I'd like to point out that, despite 2Q revenue indicating a decline, guidance came ahead of consensus expectations, thanks in large part to improving trends in Germany and Italy.
The bad
MAN's largest market and source of revenue is Europe, but the company is seeing negative operating trends there and in the United States as customers cut back on hiring due to the weakening macroeconomic environment. Key changes observed by management include a smaller need for temporary workers, stricter hiring practices, and longer sales cycles. The combined effects of all these factors have led to a decline in revenue trends, with the decline in revenue widening from 0.9% year over year in the fourth quarter to 3%, according to the midpoint of the guidance for the second quarter of 2023 provided by management, after adjusting for currency fluctuations. Looking at France, we see that revenue trends are deteriorating as well, with management expecting a slight y/y decline in fx-neutral revenue in 2Q compared to 1Q's 2.5% growth, due to market and manufacturing headwinds, reinforced by soft PRISME data. The United States is also experiencing a similar trend, with management expecting year-over-year decline will accelerate from the 13.4% recorded in 1Q23 due to a slowdown in manufacturing and a general reduction in hiring. When looking at other divisions, MAN's high-margin businesses like Experis and Talent Solutions are down year over year (on an organic fx-neutral basis) due to tough comps and an incrementally more challenging operating environment.
In my opinion, the most concerning issue that could unsettle investors is the notable year-over-year reduction in MAN's EBITA margin in the near future. This is primarily due to negative operating leverage, as well as investments in digitalization initiatives and growth sectors such as Experis and Talent Solutions. The combination of declining revenue and EBITA margin could result in a negative perception that could adversely impact the company's stock price in the short term.
Outlook
For the time being, I expect the stock to remain weak due to weakening demand and the uncertain economic environment. Additionally, I see risk to the company achieving guidance given that it was based on trends from April and the macro remains uncertain, which suggests that some consensus is already expecting a significant miss. Since 2Q22 was the company's peak performance, I anticipate that tougher comps in 2Q23 will put a squeeze on EBITA margin. For the 2Q23, I anticipate a decline in revenue as I anticipate continued restrained spending in the United States to be offset by strength in other regions. When it comes to profits, I anticipate that MAN will (sequentially) optimize their cost base by cutting back on areas of slowing demand, and employees. Nonetheless, management is likely to keep investing in growth opportunities and strategic digital areas. Overall, I anticipate continued revenue pressure from an unstable macro and future margin pressure from tough comps and operating deleverage.
Conclusion
In conclusion, despite the positive long-term prospects of MAN, the company is facing several challenges in the near term. The company's largest market and source of revenue, Europe, is experiencing negative operating trends due to weakening macroeconomic conditions. Additionally, the guidance for 2Q23 has caused consensus to lower their earnings guidance for the full year, and the organic fx-neutral same day basis revenue was down 4% year-over-year in 1Q23. Furthermore, the most concerning issue is the notable year-over-year reduction in MAN EBITA margin in the near future. Although the company has a counter-cyclical nature, increased outplacement volumes due to the economic downturn are not enough to offset the negative trends in the US and Europe. While the normalization of the global supply chain and China's reopening are positive signs, it may be prudent to wait for the share price to drop even further before investing. Therefore, a neutral rating is recommended for the foreseeable future.
For further details see:
ManpowerGroup: Stock Price To Be Very Uncertain In The Near Term