|Shares Out. (in M):||56||P/E||15x||13.7x|
|Market Cap (in $M):||1,750||P/FCF||14x||12x|
|Net Debt (in $M):||350||EBIT||143||164|
On Assignment is a terrific business with strong secular tailwinds and an advantageous market positioning that should double in value over the next 3-5 years as the Company executes on its growth plan. Though not cheap on absolute valuation metrics, it is trading at a significant discount to intrinsic value, particularly given the high quality and low capital-intensity of the business
Company Overview: On Assignment (“the Company” or “ASGN”) is a leading provider of staffing services for high-skilled roles in the technology (83% of revenue), life sciences (10% of revenue) and healthcare (7% of revenue) sectors. Through its approximately 150 branch offices predominantely located in the United States, the Company serves over 5,000 business customers ranging from SMBs to Fortune 500 enterprises and across various end-markets. ASGN focuses on temporary staffing (95% of revenue), where it provisions employees for a limited duration of time, and has a growing presence in permanent staffing. The Company is headquartered in Calabasas, California, and is expected to generate approximately $1.8 billion in revenue for FY2014.
Staffing Business Model: As a provider of temporary staffing services, ASGN’s core value proposition is to assume the time intensive recruiting processes – candidate screening, resume review, initial interviewing and correspondence – that its customers often lack the resources to perform on their own. As the legal employer of record, ASGN also alleviates the complexities and administrative burdens for an employer to engage a temporary employee (“temp”), as the Company coordinates the filing and payment of workers’ compensation insurance, state and federal unemployment taxes and social security contributions. Further, the Company offers customers a vast network of candidates that have been vetted by its recruiters through prior assignments. ASGN’s permanent staffing services provide a similar value proposition, with the exception that ASGN is not the employer of record for candidates hired into full-time positions.
Unit Economics: For its temporary staffing services, the Company earns a spread between the rate at which its customers pay ASGN for each hour of work performed by the temp (“bill rate”), and the hourly rate at which ASGN, in turn, pays the temp (“pay rate”). Depending on the employee’s skill level, bill rates for ASGN's workers can range from $50 per hour to $100+, and represent a negotiated mark-up to the pay rate. The duration of a temporary staffing engagement generally lasts no longer than twelve months. For permanent staffing services, which can arise from active temporary assignments, ASGN earns fees representing approximately 20% of the candidate’s first-year compensation.
Industry and Competition: The industry research firm Staffing Industry Analysts sizes the U.S. temporary staffing market at $134 billion, with 54%, or $72 billion, concentrated in professional roles encompassing the areas served by ASGN. The industry is highly fragmented for staffing deployments at small businesses, with competition largely from local or regional staffing firms, whereas ASGN competes against a limited number of other national firms such as Allegis Group (private), Kforce (Ticker:KFRC) and ManpowerGroup (Ticker:MAN) for deployments at larger enterprises. Within IT temporary staffing, ASGN is the second largest provider in terms of revenue, behind Allegis.
Secular Trends: The temporary staffing industry has benefitted from growth tailwinds as businesses of all sizes, having experienced the Great Recession, are reluctant to commit to full-time resources especially considering the uncertain macro and political environments. Instead, businesses have increasingly turned to temps to fulfill personnel needs as they arise, while retaining flexibility to cease employment without financial, legal or organizational burdens. As a result, the penetration of temps in the United States, as a proportion of total employees, has recently surpassed prior cyclical peaks to a high of 2.11% in October 2014 per U.S. Census Bureau data. Industry practitioners estimate that temporary penetration is actually higher in the IT sector, where rapid adoption cycles of new products lends a need for highly specialized skill sets not readily available in-house. Further, temporary staffing in the IT sector is a favorable external labor source relative to other deployment models, as offshoring offers less control and consulting is significantly more expensive. While temporary staffing has, since the 2008/2009 recession, largely grown as a result of the aforementioned secular tailwinds, several public company management teams report recent signs of a cyclical upswing driving growth.
Organizational History: ASGN was founded in 1985 as Lab Support, providing staffing services for clinical/scientific roles. The Company listed on NASDAQ in 1992 and over the next ten years diversified into the healthcare sector. Current CEO Peter Dameris joined ASGN, then a $100-$200 million market capitalization business, in 2003 as COO and was promoted to the CEO role in 2004. In 2007, Dameris drove the Company’s expansion into physician staffing with the acquisition of VISTA Staffing Solutions for $50 million, and IT staffing with the acquisition of Oxford Global Resources for $213 million. The Company went on to complete a number of tuck-ins, and in 2012 enacted the transformational acquisition of Apex Systems, a provider of IT staffing solutions, for $610 million. As opposed to Oxford, which focuses on high-end IT solutions for time sensitive projects (e.g. application development), Apex focuses on lower-end solutions that “keep the lights on” (e.g. IT help desk).
Capital Allocation Track Record: The ASGN management team has exhibited shrewd capital allocation. ASGN has acquired quality businesses at reasonable multiples, generating EPS accretion within one year. In particular, the Company acquired Oxford for 8.7x EV / LTM EBITDA and Apex for 7.9x EV / LTM EBITDA (excluding synergies but including an NPV estimate for acquisition tax savings). ASGN retained the leaders of both Oxford and Apex, who currently serve as divisional presidents. Following the acquisition of Apex, the Company’s balance sheet carried a total debt / pro forma EBITDA multiple of 3.8x, which was reduced to 2.3x within a year after closing and stood at 2.0x in Q2 2014 when the Company initiated a $100 million share repurchase program to take advantage of the stock’s attractive valuation.
Operational Track Record: Management has also exhibited sound operational performance. Upon joining the Company in 2003, Dameris led a rebound following years of stalled growth, exhibiting a 21.9% revenue growth CAGR from 2004 through 2006 and returning the Company to cash flow positive. As a business leveraged to the U.S. macro economy, ASGN’s revenue declined 32.6% on an organic basis in FY2009. We estimate that, had ASGN owned its current set of assets, its revenue would have declined by approximately 8% on an organic basis during FY2009 (Apex’s revenue declined only 5% in FY2009 due to the critical nature of services performed by its temps). Over the last three years ending Q3 2014, we estimate that ASGN has posted a 13.4% organic revenue CAGR, while improving its EBITDA margin by 120bps, cumulatively. During this timeframe, ASGN’s organic revenue growth has meaningfully exceeded industry average growth figures, provided by Staffing Industry Analysts, of 8-9% for professional/specialty temporary staffing and 9-10% for IT temporary staffing, in particular. ASGN’s organic revenue growth has also exceeded blue-chip competitor, Robert Half (Ticker:RHI), which exhibited a staffing revenue CAGR (excluding its consulting division) of 7.0%, with its IT staffing division at a 11.3% revenue CAGR, during the three year period ending Q3 2014.
Thesis: At the current price of approximately $31 per share, ASGN represents an attractive risk/reward investment opportunity in a high quality business leveraged to strong secular tailwinds. Based on our FY2015 estimates, the Company’s levered free cash flow yields approximately 7% to the current equity value due to the minimal capital requirements of the business. We expect ASGN’s stock price to exceed $60 over the next three to five years as the Company grows revenue organically by high-single/low-double digits, expands margins modestly and efficiently deploys capital across accretive M&A and share repurchases. Downside is limited from here, in our view, due to a significant re-set of growth expectations, as further outlined below.
Opportunity and Valuation: Having produced consistent double-digit YoY organic revenue growth since its acquisition of Apex in mid-2012, the Street was disappointed when growth decelerated to 8.6% YoY in Q2 2014. The Company’s stock price fell 23% on July 31, the day following ASGN’s Q2 earnings report, in what we believe is an overreaction to a slight revenue miss (0.5% lower than Street consensus) based on transient and explainable forces. Notably, ASGN saw choppiness in ERP-related implementations and healthcare IT projects in its Oxford segment, as well as a moderate pause in demand due to the timing of projects at enterprise accounts in its Apex segment – an impact we believe to be concentrated among a few large financial services firms. Having historically traded at 11.9x EV / NTM consensus EBITDA-CapEx since its acquisition of Apex, at $31/share ASGN trades at an attractive 10.2x EV / NTM consensus EBITDA-CapEx – representing a 14% discount to its history. Further, while ASGN, since its acquisition of Apex, has traded in-line with its close peer RHI on the basis of EV / EBITDA-CapEx, it now trades at a 30% discount. In ASGN’s Q3 2014 earnings report, the Company posted respectable, but still below its long-term potential, organic YoY revenue growth of 7.2% as it works through much of the same issues noted in Q2. As the Company’s stock price has drifted upward modestly following the Q3 report, we believe that growth expectations have been reset, leaving room for ASGN to surprise to the upside as we estimate organic revenue growth will reaccelerate to double-digits during FY2015.
Bounceback to historical growth rates