The Robert Walters (LSE: RWA) share price rallied yesterday after it released its trading update for the first quarter of 2021. The key takeaway was how the board is ”currently confident that profit for the year is likely to be comfortably ahead of market expectations”.
To me, this confirms that the recruitment market is improving. In fact, I reckon the hope of a recovery has been one of the drivers behind the increase in the Robert Walters share price. But for now, I’m watching the stock, especially when it’s sitting on a high price-to-earnings (P/E) ratio of 80x.
Trading so far
I’m stating the obvious here, but of course the pandemic was going to have an impact on a recruitment business.
But Robert Walters’ use of technology meant that most of its employees could work remotely during the pandemic. At least the business did not come to a grinding halt.
However, when companies are faced with challenging times, costs are the first in line to be cut. For many firms this means reducing the number of employees. This is not news Robert Walters wants to hear.
Trading activity has been down across all of the recruiter’s geographical regions. I don’t think that’s a surprise. After all, the coronavirus crisis has been a global one. In fact, Asia Pacific is Robert Walters’ largest region by net fee income.
But I think the main point here, is that the company is starting to see positive trading momentum, which has continued through the first quarter of 2021. As I previously mentioned, it has even indicated that profit is likely to be ahead of expectations. I reckon that will boost the Robert Walters share price in the short-term.
Strong financials
I think it’s worth highlighting that the recruitment company is in a strong financial position. It has an impressive balance sheet, with net cash of approximately £140m.
In fact, Robert Walters did not need to raise any external finance to weather the coronavirus storm. I think that’s impressive and perhaps justifies the stock being so expensive.
It’s encouraging to see that it reinstated dividend payments in November. That further emphasises the company’s strong financial position, I feel. It’s paying a dividend because it can afford to.
My concerns
According to Robert Walters, recruitment has seen some positive momentum so far. But I take this with a pinch of salt. I don’t think the recovery will mean companies will start hiring straight away.
It’s likely that firms will be taking a cautious approach going forward. In fact, most have been operating as leaner entities during the pandemic. With new and extended lockdowns still occurring across the world, I think recruitment markets are likely to remain challenging.
This could impact the Robert Walters share price, especially when the stock is trading at a high P/E ratio. This means that the shares are likely to be very sensitive to any delays or setbacks in companies hiring.
I’m nervous about dipping my toe in. So for now, I’ll be watching the stock closely.