2023-04-18 13:37:37 ET
Summary
- Insperity, Inc. provides outsourced human resources and HCM services to small- and medium-sized businesses.
- The firm has produced growth and continued operating profits despite attempts to slow the U.S. labor market.
- Insperity may be overvalued at its current level, and cooling down the employment market is squarely in the sights of the U.S. Federal Reserve.
- I'm on Hold for Insperity, Inc. in the near term.
A Quick Take On Insperity
Insperity, Inc. ( NSP ) provides a range of outsourced HR and human capital management services to small- and medium-sized businesses.
The firm’s stock has decoupled from larger competitor Automatic Data Processing, Inc. (ADP) and produced price gains recently.
However, given the problematic macroeconomic environment and multiple headwinds as we continue through 2023, I’m on Hold for NSP in the near term.
Insperity Overview
Kingwood, Texas-based Insperity, Inc. was founded in 1986 and provides small- and medium-sized businesses with a variety of outsourced human resources and related human capital management business solutions
The firm 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 company’s primary offerings include the following:
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Consulting
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Benefits Administration
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Payroll Services
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Employee Training
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Recruiting and Staffing
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Technology Solutions.
NSP acquires customers through its direct sales and marketing efforts as well as through partner referrals and online marketing.
Insperity’s Market & Competition
According to a 2022 market research report by Grand View Research, the global market for human resource management was estimated at $19.4 billion in 2021 and is forecast to reach $57.3 billion by 2030.
This represents a forecast CAGR of 12.8% from 2022 to 2030.
The main drivers for this expected growth are a growing adoption of automated and digitized HR operations to improve organizational efficiencies and flexibility in various economic environments.
Also, the chart below shows the historical and projected future growth trajectory of the U.S. human resource management market:
U.S. HR Management Market (Grand View Research)
Major competitive or other industry participants include:
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Accenture
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ADP
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Cezanne HR
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Ceridian HCM
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Kronos
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Mercer
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PwC
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Cegid
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UKG
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Workday.
Insperity’s Recent Financial Trends
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Total revenue by quarter has grown per the following chart:
Total Revenue (Seeking Alpha)
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Gross profit margin by quarter has varied within a narrow range, as shown here:
Gross Profit Margin (Seeking Alpha)
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Selling, G&A expenses as a percentage of total revenue by quarter have also remained fairly stable:
Selling, G&A % Of Revenue (Seeking Alpha)
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Operating income by quarter has fluctuated seasonally:
Operating Income (Seeking Alpha)
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Operating leverage by quarter has generally been positive, but turned slightly negative in the most recent reporting period:
Operating Leverage (Seeking Alpha)
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Earnings per share (Diluted) have trended higher in recent quarters compared to the prior year:
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP.)
In the past 12 months, Insperity’s stock price has risen 23.1% vs. that of ADP, which has dropped 5.9%, as the chart indicates below:
52-Week Stock Price Comparison (Seeking Alpha)
For the balance sheet , the firm ended the quarter with $765.9 million in cash, equivalents and short-term investments and long-term debt of $369.4 million.
Over the trailing twelve months, free cash generated was $317.4 million, of which capital expenditures accounted for $30.3 million. The company paid $50.1 million in stock-based compensation ("SBC") in the last four quarters.
Valuation And Other Metrics For Insperity
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 0.7 |
Enterprise Value / EBITDA | 15.7 |
Price / Sales | 0.8 |
Revenue Growth Rate | 19.4% |
Net Income Margin | 3.0% |
GAAP EBITDA % | 4.7% |
Market Capitalization | $4,680,000,000 |
Enterprise Value | $4,350,000,000 |
Operating Cash Flow | $347,690,000 |
Earnings Per Share (Fully Diluted) | $4.63 |
(Source - Seeking Alpha.)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:
Discounted Cash Flow For NSP (GuruFocus)
Assuming generous DCF parameters, the firm’s shares would be valued at approximately $115.40 versus the current price of $128.00, indicating they are potentially currently overvalued, with the given earnings, growth, and discount rate assumptions of the DCF.
Future Prospects For Insperity
In its last earnings call ( Source - Seeking Alpha ), covering Q4 2022’s results, management highlighted its "strong" Q4 renewal results, with Q4 being a heavy renewal period on a seasonal basis.
The firm was also successful in achieving its mark-up price increases while client retention "came in near [its] Q4 forecasted levels."
However, client hiring slowed in Q4 and will likely continue to be sluggish into 2023, as services economy inflation is a focus of U.S. Federal Reserve interest rate increases.
Looking ahead, management is forecasting a wide potential adjusted EPS result for 2023, from a decrease of 6% to a potential increase of 13% when compared to 2022’s results.
The company's financial position is fairly strong, with ample liquidity, low debt and very strong free cash flow.
Regarding valuation, my discounted cash flow calculation suggests that NSP may be somewhat overvalued at its current price level of around $128.00
The primary risk to the company’s outlook is the apparent determination of the U.S. Federal Reserve to reduce labor cost pressures in the service sector by continuing to raise interest rates, which many economists expect to remain "higher for longer."
Furthermore, the recent banking crisis is starting to cause smaller and regional banks to reduce their lending activity, which may hamper business expansion and resulting employment growth.
Given the problematic macroeconomic environment and multiple headwinds, as we continue through 2023, I’m on Hold for Insperity, Inc. in the near term.
For further details see:
Will Insperity Feel Labor Market Crumble In 2023?