Expanding Into Outcome-Based Solutions And Specialty Segments Will Strengthen Future Operations

Key Takeaways

• Shifting towards higher-margin areas and strategic acquisitions aims to improve profit margins and revenue growth through synergies and enhanced scale.
  
• Operational optimization and omnichannel strategies are set to boost market share and earnings by increasing efficiency and expanding service reach.
  
• Leadership transition and difficult market conditions could hinder growth plans, while acquisition challenges and competitive pressures threaten financial stability and profitability.

Catalysts

Provides workforce solutions to various industries.

• Kelly Services has been focusing on shifting its business mix toward higher-margin, higher-growth areas, such as outcome-based solutions and specialty segments like education and therapy, which is expected to improve profit margins and drive revenue growth.
  
• The acquisition of Motion Recruitment Partners (MRP) is anticipated to create revenue and cost synergies by integrating MRP's IT and telecom staffing with Kelly's existing portfolio, enhancing scale and capabilities, and consequently improving EBITDA margins.
  
• The ongoing omnichannel delivery strategy in professional and industrial segments, along with large enterprise account strategies, are expected to increase Kelly's market share, resulting in revenue growth.
  
• Kelly Services plans to optimize its operating model by integrating OCG and P&I segments under common management, aiming to improve operational efficiency and potentially increase net margins through streamlined processes.
  
• The company's focus on driving incremental EBITDA margin expansion through strategic growth initiatives and efficiency improvements is expected to enhance overall earnings performance.

Kelly Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kelly Services's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.0% today to 3.6% in 3 years time.
• Analysts expect earnings to reach $180.6 million (and earnings per share of $5.08) by about April 2028, up from $-600.0 thousand today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.2x on those 2028 earnings, up from -655.9x today. This future PE is lower than the current PE for the US Professional Services industry at 20.8x.
• Analysts expect the number of shares outstanding to decline by 1.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

Kelly Services Future Earnings Per Share Growth

Risks

• The announced retirement of the current CEO, Peter Quigley, and the leadership transition could lead to strategic and operational disruptions, potentially affecting the company's execution on growth plans, impacting revenue and profitability.
  
• Although the company is focused on higher-margin, higher-growth areas, it recently took a significant $72.8 million non-cash goodwill impairment charge related to an acquisition that underperformed, indicating potential challenges with forecasting and financial discipline that could affect earnings.
  
• Market conditions remain challenging, with persistent caution from customers and a stagnant staffing demand, which could result in lower revenue and profitability if this trend continues.
  
• Competitive pressures and pricing strategies in the staffing industry, especially given that lower-margin businesses are a larger part of revenue, could compress net margins and affect overall financial health.
  
• Integration risks related to recent acquisitions like Motion Recruitment Partners could challenge the company's ability to achieve expected cost and revenue synergies, impacting EBITDA margins and financial stability.

Valuation

• The analysts have a consensus price target of $27.0 for Kelly Services based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.0 billion, earnings will come to $180.6 million, and it would be trading on a PE ratio of 6.2x, assuming you use a discount rate of 7.7%.
• Given the current share price of $11.28, the analyst price target of $27.0 is 58.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.