|Shares Out. (in M):||66||P/E||0||0|
|Market Cap (in M):||34||P/FCF||0||0|
|Net Debt (in M):||-6||EBIT||0||0|
Command Center supplies short-term manual labor for the hospitality (25% of revenue), retail (20%), construction (20%), warehousing (20%) and transportation /auto auctions (15%) industries and has traded off significantly this year as Bakken-based revenue has weighed on revenue growth. It currently trades at 6x LTM EBITDA and at a steep discount to peers. The Company employs over 32k workers and owns/operates 57 on-demand labor stores in 22 states to serve as flex capacity for businesses that need to adjust staffing levels to meet sudden shifts in production or temporarily replace full-time employees. Its top 10 customers accounted for 27% of 2014 revenue.
Staffing companies primarily compete on price and availability. The industry is highly fragmented (a significant proportion have fewer than 5 locations) and entry barrier are minimal, although onerous working capital demands - particularly in the spring/summer - can hamper growth for smaller players. There are some local scale economics in the form of better matching staffing with client need and training costs, but not much. According to the Company, in the US there are 100 large, national staffing companies and 10,000 that operate at the local level. CCNI sizes the total U.S. staffing market at $100bn with light industrial/blue-collar (CCNI’s market) representing 28% of that. Laborers are typically paid on the same day services are performed while customers typically pay CCNI after 30-days. The Company has a full recourse factoring agreement in which Wells Fargo pays 90% of face value for eligible accounts that goes through April 2016.
In 2006 the Company acquired 57 stores from former franchisees and opened an additional 20 additional, shifting its focus from franchising to operating on-demand staffing stores. The Company really misfired after that, investing heavily in infrastructure to support its goal of hitting 100 stores by 2008 just as the economy turned. Revenue was cut by almost have in 2008 and 2009 and the Company scrambled to cut costs and close stores.
In February 2013, the founder/CEO Glenn Welstad was deposed and replaced by Frederick “Bubba” Sanford (a former Navy SEAL/consultant/serial entrepreneur), who refocused the Company on profitability. During his first two years, things progressed nicely - redundant costs were cut, unprofitable branches closed, working capital rationalized. Unfortunately, CCNI also pushed into oil/gas tethered regions and the subsequent stress in the energy sector has precipitated depressed economic conditions in the Bakken region (where the Company has 5 offices), decimating a > company-average margin source of revenue and catalyzing a ~30% sell-off in CCNI shares since January. But outside of the Bakken, things are pretty swell…revenue growth in branches outside of North Dakota has grown 11.4% YTD, even as CCNI’s Bakken branches have declined by 36.6%.
Still, I think the sell-off excessive. I estimate that the Company has about $15mn in annual revenue from Bakken. If we assume that Bakken revenue declines another 50% from here (mind you, the LTM numbers already reflect most of the selloff) while the balance comps at +hsd (as it has been), we’re probably looking at a $1.5mn hit to LTM EBITDA, bringing it to around low $3’s million. CCNI shares are currently trading at ~9x-9.5x that number, which is still a discount to peers who trade around 10x (BGSF – 8.7x; KELYA – 12.8x; KFRC – 10.9x; MAN – 9.5x; ASGN – 16.6x; TBI – 9.4x). Also significantly, CCNI has continued to generate about 8c in FCFE/share LTM (15% of the current share price).
In a bear case scenario in which Bakken revenue falls another 50% and non-Bakken comps down 20% (similar to CCNI’s comp in 2009), the EBITDA burn might be around $2.5mn-$3mn (assuming no reactionary cost cuts), which, given the Company’s strong balance sheet, is hardly devastating. At 0.2x that revenue (where the Company traded in 2009), this is a $0.20 stock.
It doesn’t seem to unreasonable to suppose that NTM Bakken revenues stay flat from today while the rest of Command comps msd/hsd, in which case we might be looking at $6.5mn in EBITDA. This is a mediocre business that probably isn’t worth more than 7x….but still, with that, plus say another 8c in interim cash build, we’re at nearly 90c in per share value…..and there’s further upside from branch openings and acquisitions.
But until that time comes, management is focused on improving same store sales, branch growth, acquisitions and share buybacks (authorization for ~14% of dso) in that order. The returns on new branches are quite attractive – I think they can probably do $110k in EBITDA per branch at maturity (~2 year ramp; hsd margins) and working capital requirements should be rather minimal, maybe $250k-$300k, because of its factoring facility with Wells Fargo; but the Company tells me that finding store managers remains the key binding constraint. Wrt acquisitions, the CCNI will typically pay a seller’s multiple of 2.5x-3.5x EBITDA on smaller fold-ins and up to 4x on larger ones where it can find some overhead synergies. In any case - large or small, synergies or no - the returns well exceed its capital costs. I think that the buyback authorization, while big at 14% of shares, will be tough to fully execute given the illiquid nature of the stock.
Finally, there’s been some meaningful insider buying from a director in September in the high-50c range and by Bubba in August at around the current price.
|Subject||Few questions to start discussing going|
|Entry||12/03/2015 03:28 AM|
Castor13, thank you for the write up.
Let me ask you a few questions.
1. Operating margin. What's your view on an operating margin going forward?
2. Workers comp and insurance. The deductible per incident is pretty high as far as I recall. Are you concerned?
3. Where are we in the cycle. We have a very low unemployment rate in the U.S. now. This would benefit temp staffing companies. Do you think you may be buying at the peak of the cycle in terms of earnings?
Tnx in advance.
|Subject||Re: Few questions to start discussing going|
|Entry||12/03/2015 05:07 PM|
thanks for your questions.
re: operating margins
close to 90% of costs vary with revenue, so not a lot of operating leverage in either direction, which keeps operating margins within fairly constrained bands. in an industry like this, with no sustainable competitive advantages, the best any company can really do is operate as efficiently as possible and on that front, I think Bubba & co. perform admirably relative to peers...the company's decentralized model comes w/ little overhead and a meaningful proportion of branch manager comp is tied to store level profitability...with respect to cost cuts/operating efficiencies, the low hanging fruit has been mostly picked at this point and the focus now is same store sales growth and safety. i would expect no better than high-single-digit EBITDA margins (7%-8%) for a company like this and you're probably averaging about 6% through a business cycle.
re: worker's comp
it's a trade-off right? so, they're exposed to some more risk but they get a break on premiums; thus far, they've done a very fine job containing wc costs (before Bubba got there, it was running around 6-7% of rev, now it's down to < 3%). i could be wrong, but moving the deductible from 250 to 500 doesn't seem to me like that big of a deal in the context of the company's cash generation, and overall, management strikes me as pretty conservative/risk averse.....i'm sure they carefully ran through the saved premiums vs. expected claims payout calculus and decided in-housing was more economical.
re: employment cycle / peak earnings
i think you have to look at their revenue by industry (they're pretty well diversified) and sort of go down the line. i think assuming 08/09 as a downside case is sufficiently onerous...everyone can assign probabilities as they will. i feel you though, big picture, it does sort of feel like demand is generally waning across multiple sectors (based on the conference calls of various companies i listened to last quarter), so size appropriately.
|Subject||Re: Re: Few questions to start discussing going|
|Entry||12/03/2015 05:38 PM|
Thank you for your responses, Castor.
When I spoke with CFO and asked about Co's target / goal / long-term vision on operating margins (not EBITDA margins, but different is small given low D&A), he gave me a very broad range of 5% to 8%. My reaction was "you are already doing that. Shouldn't you aim higher?"
I have done some work on the name, run the valuation, etc. It seems cheap. But there is just smth that does not make me comfortable to put it as a long (it of course does not mean that it is a bad long whatsoever!). Maybe it is a lack of any sustainable competitive advantage.
Let me ask you smth else. It looks like the industry is consolidating. Have you looked at potential M&A scenarios? Who do you think can become acquirers? I have not done much work on this angle so would appreciate your thoughts.
|Subject||Re: Re: Re: Re: Few questions to start discussing going|
|Entry||12/09/2015 06:20 AM|
Thank you, Castor. Appreciate your thoughts. I was actully thinking more along the lines of CCNI being acquired by someone else instead of CCNI going on a buying spree.
|Subject||Re: Re: Re: Re: Re: Few questions to start discussing going|
|Entry||12/14/2015 07:31 AM|
Too bad Bubba has done such a terrible job on IR, which has really hurt the stock price. Hopefully he has learned a painful lesson. Who knew a former navy seal would be scared of a bunch of microcap investors!!
|Subject||new Board Member / continued buyback|
|Entry||04/12/2016 11:10 AM|
Command Center announced a new Board member today, Rimmy Malhotra.
This should be a big positive for the Company as Rimmy is known as an astute value investor. We hope that he will continue to push for an increased share buyback.
We see no reason that CCNI can't earn a consistent $4-$5m in EBITDA as the oil regions stabilize. Their non oil regions are growing nicely and there are big tailwinds for temporary employment.
This cash flow stream plus the NOL is worth substantially more than the current share price and we hope that Rimmy can help close that gap.
|Subject||Re: new Board Member / continued buyback|
|Entry||04/12/2016 12:06 PM|
Hope you're right. What are you basing your assesment of him as an "astute value investor" on? Resume seems thin to me, but limited info admittedly available.
|Subject||Re: Re: new Board Member / continued buyback|
|Entry||04/12/2016 03:47 PM|
Rimmy worked at Spencer for a number of years and had great training there. Spencer Capital has an excellent reputation for deep value investing and (occasional) activism.
|Subject||buyback - note from 8K that included new BOD member announcement|
|Entry||04/13/2016 12:09 PM|
Prior to joining the Board, Mr. Malhotra executed and there is currently in effect a “10b-5 plan” as prescribed by Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934, as amended, for the purchase of Command Center common shares.
|Subject||Form 3 shows new Director owns over 1.2m shares|
|Entry||04/13/2016 02:42 PM|
Form 3 just hit the tape showing the new director owns 1.286m shares, or roughly 2% of the Company. This should truly help align Board and Shareholder interests.
|Subject||CCNI buys competitor for 2.4x EBITDA - shares undervalued by 50-60%|
|Entry||06/07/2016 04:21 PM|
CCNI announced the acquisition of Hancock Staffing yesterday. The 8-K was not filed until today. According to the 8-K, The business that CCNI bought had the following results for the year ended Dec 31 2015:
Gross Profit: $1.92m
Adj EBITDA (includes addbacks): $0.92m
We have attempted to make a guess on what the addbacks could be given the info in the 8-K and come to the following guess:
Payroll tax: 20k
Acct & Legal: 40k
Health Ins: 20k
Total Addbacks: 270k
CCNI paid roughly $2m for this business + another 200k in earnout.
At $2.2m / 920k this equates to 2.4x EBITDA
Pro Forma, we think that core CCNI is capable of modest growth this year (5%) and EBITDA margins of at least 5%
EBITDA: $4.6 - $5.0m
If we add the $920k in acquired EBITDA (assumes no growth and that our addbacks are very modest), we get to:
total CCNI EBITDA range: $5.5m - $6.0m
Since CCNI has no debt and has a fair amount of NOLs, we can assume that EBIT approximates Net Income.
EBITDA: $5.5 - $6.0m
less D&A: $0.3m
Net Income: $5.2 - $5.7m
eps: $0.08 - $0.09
This puts CCNI at 5x earnings.
At 8x earnings, a discount to where True Blue (TBI) trades, the stock is worth $0.68, or 60% more than the current price today.
|Subject||Re: CCNI buys competitor for 2.4x EBITDA - shares undervalued by 50-60%|
|Entry||09/21/2016 01:49 PM|
Have you revised your Core CCNI estimates or are you sticking to those you posted on June 7, 2016?
LTM Adj EBITDA / LTM EBIT do not look too inspiring. Hence, I was wondering what I am missing.
Thank you in advance!