Lower Margin Renewable Energy Mix Will Pressure Results Yet Eventually Support A Healthier Business

Catalysts

About TrueBlue

TrueBlue provides specialized and on-demand staffing, recruitment process outsourcing and workforce solutions across sectors such as energy, transportation and health care.

What are the underlying business or industry changes driving this perspective?

• Although energy sector revenue more than doubled in the quarter and PeopleReady grew 17%, the heavier mix toward lower margin renewable energy work and related pass through travel costs may limit the benefit to gross margin and earnings if this mix shift persists.
• While the commercial driver business delivered its fifth consecutive quarter of double digit revenue growth and is taking share in transportation, persistent softness in broader freight volumes or additional site shutdowns at key clients could restrict overall PeopleManagement revenue and segment profit expansion.
• Although the acquisition of Healthcare Staffing Professionals and entry into additional states aligns with long term demand in U.S. health care, slower than expected hiring volumes or pricing pressure from hospital systems could dampen the contribution to PeopleSolutions revenue and segment margins.
• While TrueBlue is investing heavily in its proprietary digital platforms, including JobStack price estimates and enterprise wide enhancements, higher software depreciation now reported in cost of services and the risk of slower client adoption could weigh on reported gross margin and delay improvement in EBITDA.
• Although SG&A declined 8% while total revenue reached US$431 million with 13% growth, future reinvestment in local sales capacity and the need to support new growth channels and partnerships may cap further net margin improvement if revenue momentum slows.

Assumptions

This narrative explores a more pessimistic perspective on TrueBlue compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming TrueBlue's revenue will grow by 4.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.8% today to 2.7% in 3 years time.
• The bearish analysts expect earnings to reach $49.1 million (and earnings per share of $1.74) by about January 2029, up from $-28.1 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 5.6x on those 2029 earnings, up from -5.6x today. This future PE is lower than the current PE for the US Professional Services industry at 24.6x.
• The bearish analysts expect the number of shares outstanding to grow by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.69%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The energy vertical and renewable projects are growing from a lower margin base, and a continued tilt toward lower margin work with pass through travel costs could keep gross margin under pressure and limit the flow through of higher revenue into earnings.
• Health care staffing and RPO are tied to hiring volumes that management describes as subdued. A prolonged period of cautious customer sentiment or slower hiring recovery in health care, engineering and technology could weigh on revenue growth and delay any improvement in net margins.
• The company reported a net loss of US$2 million and is relying on cost cuts and operating leverage to improve profitability. Any need to reinvest more heavily in sales capacity or technology than expected could restrict the pace of earnings improvement and keep adjusted EBITDA modest.
• TrueBlue operates in a highly fragmented staffing market where clients are described as price sensitive. Persistent pricing pressure from smaller competitors or cost conscious customers could limit pricing power and constrain both revenue and gross margin.
• Higher software depreciation is now recorded in cost of services, and potential slower adoption of digital platforms or sales initiatives could keep reported gross margin and earnings under strain even if long-term demand for compliant, specialized staffing solutions remains supportive.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for TrueBlue is $7.0, which represents up to two standard deviations below the consensus price target of $8.5. This valuation is based on what can be assumed as the expectations of TrueBlue'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 $10.0, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $1.8 billion, earnings will come to $49.1 million, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $5.25, the analyst price target of $7.0 is 25.0% 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.