|Shares Out. (in M):||158||P/E||100.8x||0.0x|
|Market Cap (in $M):||586||P/FCF||NM||0.0x|
|Net Debt (in $M):||83||EBIT||12||0|
Based in Manhattan, Corporate Resource Services (CRS or The Company) is a provider of commodity temporary staffing solutions. The Company has a broad offering and doesn’t specialize in any specific vertical(s). CRS has grown to where it is today as a result of several all-stock acquisitions from TS Employment (“TSE”), privately owned by CRS’ largest shareholder. The Company’s acquisition strategy has driven growth in shares outstanding nearly as fast as revenue growth, but has provided limited returns for the business. CRS’ adjusted enterprise value is $671m, representing 38x EBITDA.
CRS is littered with red flags
CRS’ management team has been a revolving door for years. In 2009, both the President and CEO resigned. In 2010, both the CFO and Finance VP resigned. In 2011, a new CFO was hired then terminated. In 2012, the new CEO resigned and the position was filled by the current CEO/Chairman, John Messina. John Messina is a salaried VP of CRS’ largest vendor, TSE; the two businesses are located at the same address.
The related party dealings between CRS and TSE can only be described as abusive from the standpoint of a CRS shareholder. Most of CRS’ current operations are attributable to subsidiaries purchased from TSE for stock. Amounts paid to TSE represent 94% of CRS’ total revenue and 96% of its aggregate COGS + SG&A in its most recent quarter. Further, as CRS’ primary vendor, TSE has forced several payables conversions into stock when the company has come up short on working capital. Last year alone TSE converted $14m of CRS payables into 30 million shares, or roughly 30% ownership of CRS pre-money. At today’s value, TSE netted roughly $100m on last year’s conversions.
There are also several other warning signs. James Altucher, a CRS board member and a ubiquitous talking head, began pumping the stock in articles, blogs and interviews just prior to the stock’s meteoric rise. Press releases use words such as Unified Communications, SaaS, Cloud Computing, and even Apple Inc. They describe their business as a diversified technology company and tout the recent Summit acquisition, also purchased from TSE, as a “cloud” solution. We invite you to tour the demo of Summit Software, for which they paid 21m shares. The reality is CRS is little more than a temp staffing middleman, generating low-double-digit gross margins.
We snooped around to find out more about TSE and it too appears to be all form with little substance. CRS claims to be 50% of TSE’s billings implying TSE is a $1bn+ PEO services provider. Its client login link however, points to nothing. Staffmarket.com reports TSE’s 2-year PEO retention rate at 20% - with CRS at 50% of billings, this statistic is impossibly low. The TSE subsidiary from which CRS recently acquired Summit is a CLEC called Tri-Tel communications with a non-toll free client service number that the operator answered with “Hello?” after a dozen rings.
Prior to the stock’s astronomical rise, management pointed out its low sales multiple relative to other staffing businesses. As discussed below however, we think CRS’ revenue is egregiously overstated while its financials fail to reflect a sizable off-balance-sheet liability.
Its business model is structurally flawed
CRS is effectively wedged into a value chain that already operates with thin gross margins. The Company leases temp workers from TSE, places them, and pays TSE 94% of the proceeds through COGS and SG&A to provide worker salaries and PEO services. Of CRS’ total cost of services, payments made to TSE represent 99%. These payments are pursuant to a Master Services agreement that contracts for payments based on Assigned Employees - i.e., for each employee, CRS pays TSE $x.xx. Despite management’s rhetoric, this arrangement doesn’t herald the type of scale one would find in a SaaS business.
Given that CRS does not directly compensate or administer services for temps, The Company has little control over costs. This lack of control is evidenced by the steady decline of CRS’ gross margin as it has acquired subsidiaries from TSE. It is also emphasized by The Company in correspondence with the SEC. The SEC wanted to know whether CRS was receiving arm’s length billing rates from TSE. CRS revealed that they represent 49% of TSE’s billings and assured the SEC of their limited ability to advantageously influence pricing relative to other TSE customers.
As a price-taker on the top line with limited internal cost levers, CRS’ ability to expand gross margin is constrained. Positioned between the staffing agency and the customer, CRS’ gross margin is 11.5% YTD, trailing the 27% industry median by more than half and in seemingly continual decline.
Making matters worse, despite CRS’ limited control over the administration of workers, it assumes all risk for temps it places, diminishing the already questionable business proposition. This assumption of risk is the reason CRS cites for recognizing gross revenue from placement. We think that revenue should be recognized on a net basis to reflect the commercial reality of the leasing transaction with TSE. CRS’ failure to do so dramatically overstates revenue and obfuscates the economics of the business. The SEC agrees with us:
“It appears in substance [CRS] is functioning as a placement agent on behalf of TSE. It is unclear why you are not reporting revenue net of amounts paid to TSE to clearly reflect the apparent economic substance of the employee leasing transactions.”
If CRS were to report net revenue, top line would be closer to $100m, and the stock would be trading for 6.7x sales vs. an industry average of 0.6x.
Premium valuation, unrealistic expectations
CRS has issued stock so rapidly that the traditional finance news outlets haven’t kept up. Yahoo, for example, understates shares by more than 15%. Using the most recent diluted share count of 158.4m, CRS’ market value is $586m.
In order to operate its business, CRS factors receivables with Wells Fargo and Amerisource. The net advances pursuant to these arrangements total $66M. This amount is netted against CRS’ receivables and effectively removed from the balance sheet. We add this off-balance sheet liability back to CRS’ enterprise value because it is recourse to CRS. The result is an enterprise value of $671m, including related party notes payable and other long-term debt.
At 38x forward EBITDA, CRS is overvalued. The Company’s broad offering should preclude it from commanding a premium multiple relative to a vertically focused player.
As discussed above, we believe the expectation of margin expansion fails to account for The Company’s position in the value chain. We don’t believe the business can, in its current form, come close to the gross margin of its perceived peers.
The second expectation is that sales can continue to grow at a supernormal rate relative to the industry. CRS’ acquisition-driven growth has no doubt enticed retail investors that currently represent 86% of the float. Our analysis however, suggests that CRS has few options to continue its recent growth trajectory.
Organic Growth - Given the anemic margin structure and lack of working capital, a market share grab is nearly impossible. In addition, CRS finances its business by factoring receivables and has already received net advances of $66m vs. its limit of $72m. As acquisitions hit their anniversaries, we think organic growth will fall toward the industry average, currently projected to be mid-single-digits.
Inorganic Growth - CRS has a nearly zero cash balance, so an upfront cash component of an acquisition isn’t probable. An acquisition for stock would be a difficult sell at CRS’ current valuation. With the space trading around 12x EBITDA, a seller would have to be convinced that CRS’ premium valuation is deserved and sustainable. Oddly enough, The Company's growth opportunities compound as the stock price declines and can be used for acquisitions, if a seller can be convinced everything is aboveboard.
CRS has never convinced a “real” seller to accept shares as payment for a viable temporary placement business. Other than GT Systems (purchased out of foreclosure for cash collateralized by stock) and a few tuck-ins, the only sizeable acquisitions have been former TSE subsidiaries. Even Bob Cassera, owner of TSE, would likely be reluctant to sell another business with the stock’s value at such a premium.
Bob Cassera, CRS’ Majority shareholder, has massive paper gains but has yet to convert that value to cash. Given CRS’ diminished prospects for growth and constrained margin structure, Cassera has little incentive to continue holding. CRS’ precarious positioning and astronomical valuation likely preclude a strategic buyout. Negligible cash flows all but rule out a financial buyer. In fact, for $300m, an investor could buy CDI, an established staffing business subject to all the same trends as CRS but generates $1.1bn of sales and $40m of EBITDA, more than twice what we expect CRS will generate.
If Cassera's plan is to buy customers for TSE using CRS' public currency, we think current prices are a decent risk mitigant.
Although only 10% of outstanding shares are in the float, we have intermittently located borrow (~4.5% rebate) and even the small float equates to ~$60m of market cap. We expect the float and borrow availability to increase as Cassera monetizes a piece of his position.
DISCLAIMER - This report is neither a recommendation to purchase or sell any securities mentioned. The authors may or may not have a position in any security discussed in this report. Further, the authors may buy or sell shares in any company mentioned, at any time, without notice. The information contained herein is believed to be correct as of the posting date. Readers should conduct their own verification of any information or analyses contained in this report. The authors undertake no obligation to update this report based on any future events or information.
|Subject||you beat me to posting this... by a few hours|
|Entry||10/21/2013 04:55 PM|
needless to say, i agree with the writeup.
|Subject||RE: you beat me to posting this... by a few hours|
|Entry||10/22/2013 06:17 AM|
Sorry Heffer...anything to add?
|Subject||RE: No borrow|
|Entry||10/24/2013 05:21 PM|
Found the same - no borrow anywhere, buy-ins supposedly happening. Great idea otherwise :)