US Trade Will Hamper Outlook While Protiviti Will Deliver Resilience

Key Takeaways

• Economic uncertainties and client caution are suppressing hiring, potentially impacting Robert Half's future earnings and net margins negatively.
  
• Revenue pressure from currency fluctuations and cost-cutting measures signal constrained growth prospects, while Protiviti's decreased margins could reduce profitability further.
  
• Robert Half's focus on revenue stability through Protiviti's growth, cost-saving measures, and strategic role retention supports margin improvement and resilience against economic changes.

Catalysts

Provides talent solutions and business consulting services in the United States and internationally.

• Revenue growth for Robert Half is predicted to slow due to heightened economic uncertainty over U.S. trade and policy developments, which have increased client and job seeker caution, elongating decision cycles and suppressing hiring activity, which could severely impact future earnings.
  
• Robert Half's net margins may face compression due to the decrease in business confidence following moderated economic growth forecasts and client caution, particularly affecting revenue-producing roles negatively, translating into tighter earnings.
  
• Continued currency exchange rate fluctuations have already decreased reported revenue by $12 million in the first quarter, which can further impact future revenue negatively if such trends persist.
  
• With an operational focus on cost-cutting, particularly in administrative structures, there is an implicit admission of constrained revenue environments which could indicate poor future growth prospects, impacting the net margin positively for now but likely limiting future earnings.
  
• Protiviti, Robert Half’s subsidiary, experienced a decrease in gross margin from 20.7% to 18.1% year-over-year, compounded by economic uncertainties and slower project starts, which, if continued, could adversely affect the overall operating income, reducing future profitability.

Robert Half Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Robert Half compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Robert Half's revenue will decrease by 0.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.6% today to 5.2% in 3 years time.
• The bearish analysts expect earnings to reach $300.0 million (and earnings per share of $3.25) by about May 2028, up from $205.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, down from 21.2x today. This future PE is lower than the current PE for the US Professional Services industry at 21.2x.
• Analysts expect the number of shares outstanding to decline by 2.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.51%, as per the Simply Wall St company report.

Robert Half Future Earnings Per Share Growth

Risks

• Robert Half's Protiviti division has shown revenue growth for three consecutive quarters, supported by a strong prospect and pipeline, which could help in stabilizing and increasing overall revenue.
  
• The company's annual cost-saving measures, which are expected to generate $80 million in savings, could bolster Robert Half's net margins through reduced administrative expenses.
  
• The company has a long-standing commitment to maintaining and increasing its dividend payouts, reflecting a priority on shareholder returns which could support earnings if the company continues to generate sufficient cash flow.
  
• The company's strategy to retain revenue-producing roles even amid cost cuts positions it to quickly capitalize on any economic upswing, potentially leading to increased revenue and improved profit margins.
  
• Protiviti's focus on non-discretionary services such as risk and compliance, internal audit, and technology consulting can cushion revenue against economic fluctuations, positively impacting earnings.

Valuation

• The assumed bearish price target for Robert Half is $35.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Robert Half's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $80.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.8 billion, earnings will come to $300.0 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 6.5%.
• Given the current share price of $43.39, the bearish analyst price target of $35.0 is 24.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.