Today’s earning update came as a blow for investors in recruitment agency Hays (LSE: HAS) – the pre-tax profit figure falling more than expected to £231m for the year. As I started writing this, the stock was down about 3.5% on the bad news, but recovered some of the losses by the time I had finished.
If you dig down into the numbers, you will discover that the company has in fact had to report two one-off charges. One of these, an £8m bill to equalise the pension provision of men and women, we can consider a sunk cost. The other charge however – a £7m bill for the restructuring its European business – is in fact expected to save the company about £5m a year going forward. Bad earnings today, for better results tomorrow.
Indeed if you look at the operating profit figure, £249m for the year, it actually comes in as expected. All things being equal, one would expect Hays to benefit from these savings going forward. Unfortunately for the company, all things are not necessarily equal.
Brexit ups and downs
One of the major problems that Hays has to face is the uncertainty surrounding Brexit. Its earnings figures have been subdued because over the past year or so, many firms have simply stopped recruiting to the same scale as they did previously, as nobody knows what the future will hold.
Of course the upside to this is that if and when the Brexit process finally does come to an end – no matter what the result – the uncertainty will be over. Though some firms may suffer individually, the removal of such an unknown factor overshadowing UK businesses should mean recruitment will pick up once more. A quick glance at the news would suggest that one way or another, some form of finalised Brexit seems more likely than it did a year ago.
Economic slowdown
The other major factor impacting Hays, and one that may be set to hurt its share price further in the next year or so is a general economic slowdown. Many signs are pointing towards slower growth, with central banks cutting or holding low interest rates to help bolster their respective economies. Manufacturing in Germany, one of Hays’ key markets, has been particularly weak of late.
While one could argue Hays has been benefiting from an upswing in the economy following the financial crisis, unfortunately any subsequent downturn will hit the company in a similar fashion. That said, there is certainly an investment case to be made for Hays.
Its share price has declined about 10% in the past month, bringing with it a current dividend yield of about 2.8%. Not the largest for an income portfolio, but certainly a decent number if you are looking for a growth stock, particularly when you consider the fact that in the past five years, the company has been able to increase its dividend payout by almost 30% per annum.
The price declines also leave the stock comparatively cheap, with a forward-looking P/E ratio of about 12. I am not yet convinced that there will be no more downside for Hays’ stock, but I certainly will be waiting for the right opportunity to get in.