It’s a positive sign when a company’s fundamentals and valuation are good enough to make it onto GuruFocus' Buffett-Munger screener, a sceener named after Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) and designed around some of their most well-known investing criteria. These two gurus, who manage Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial), became legends by finding quality companies at good or fair prices.
The newest company to join the list is Robert Half International Inc. (RHI, Financial). Thus, let's take a closer look at this company and assess its potential as a value investment.
About Robert Half
Originally known as an executive recruiting or headhunting company, Robert Half has expanded its business model over the years. As this slide from the third-quarter 2022 presentation shows, it now operates with three segments:
Contract Talent Solutions “specializes in the provision of contract engagement professionals in the fields of finance and accounting, technology, marketing and creative, legal and administrative and customer support.”
Permanent Placement is the company’s original business, and involves finding full-time accounting, finance, tax and accounting operations personnel for a fee.
Protiviti calls itself a global consulting firm that provides expertise in the areas of finance, technology, operations, data, digital, legal, HR, governance, risk and internal audit. It became a serious player in the consulting business when it hired more than 700 former affiliates of Arthur Andersen LLP in 2002 (this firm collapsed that year because of the Enron and Worldcom scandals).
Based in Menlo Park, California, the company has a market cap of $8.94 billion and trailing 12-month revenue of $7.23 billion.
Competition
Both the recruiting and consulting segments face stiff competition, for both clients and for employment candidates. Robert Half names the big four accounting firms as primary competitors to Protiviti: Deloitte, KPMG (Klynveld Peat Marwick Goerdeler), Price Waterhouse Coopers and Ernst & Young.
This chart compares its 10-year performance with Manpower Group Inc. (MAN, Financial) and ZipRecruiter Inc. (ZIP, Financial):
GF Score
Robert Half has a relatively strong GF Score of 87 out of 100.
The company earns an 8 out of 10 ranking for financial strength. That’s based on factors such as having no short- or long-term debt. The cash-debt ratio of 2.77 is actually misleading in my opinion because it contains capital lease obligations.
This alone means the company is on solid financial footing with a close to zero chance of getting into financial stress. Still, keep in mind that Arthur Andersen plunged into nothingness when the actions of a few destroyed an otherwise strong and reputable company.
The company gets an even higher ranking for profitability of 9 out of 10. The ranking is based on factors such as the operating margin of 13.47%, which is high compared with its own history and with the industry. Its margin is roughly double the business services industry median of 6.16%.
Over the past decade, the operating margin rose to 11.39%, then fell off to 6.76% in 2020 before shooting up over the past two years to 13.47%.
Given the 5 out of 5 predictability ranking, we would expect earnings to be taking a relatively consistent upward path. That’s generally what we get:
The Piotroski F-Score is 7 out of 9, which is better than average. The return on equity is an industry leading 44.69%. That’s better than 93.43% of companies in the business services industry.
The company gets a growth ranking of 7 out of 10. This rank depends on factors such as the three- and five-year revenue growth rates, the predictability of those revenue streams and the five-year Ebitda growth rate. Here’s a five-year look at revenue:
The five-year Ebitda growth profile looks much the same, although it is growing slightly faster, at an average of 8.73% per year.
Over the past five years, free cash flow growth has also risen fairly consistently, at an average of 7.29% per year. Shareholders should keep that growth rate in mind because the company pays out substantially all free cash flow to them in the form of dividends and share repurchases. According to the third-quarter presentation, Robert Half paid out $142 million in dividends and spent $258 million on share buybacks in the first nine months of 2022. Over five years, repurchases amounted to just over $2.00 billion.
The current dividend yield is 2.07%, which is slightly higher than the S&P 500 average. The dividend payout ratio is 0.29, leaving significant room for future increases.
An ambitious share repurchase program has reduced the number of shares outstanding. Robert Half has bought back shares every year for the past decade, at an annual average of 2.61% per year.
Valuation
We would expect a Buffett-Munger stock to be fairly valued or undervalued. In the case of Robert Half, overall I believe it is priced fairly. The PEG ratio comes in at 1.17, which is slightly above the fair-value mark of 1.00.
For context, here is a 10-year price chart showing the current price at the trendline:
The GF Value chart estimates an intrinsic value of $89.84, which is slightly higher than the Feb. 17 price of $81.34.
Both models of the discounted cash flow calculator find undervaluation if we assume the past 10-year growth rates will continue for the next decade. The free cash flow-based DCF estimates Robert Half’s value at $125.55, while the earnings-based DCF settles on a price of $123.51.
Gurus
Among the eight gurus who owned stakes in Robert Half at the end of 2022, Jim Simons (Trades, Portfolio) of Renaissance Technologies had the biggest holding. His 313,600 shares represented 0.29% of the company’s shares outstanding and 0.03% of his firm's latest 13F portfolio. Ron Baron (Trades, Portfolio) of Baron Funds held 75,678 shares and Joel Greenblatt (Trades, Portfolio) of Gotham Asset Management owned 54,367.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Institutional investors owned 78.99% of shares outstanding while insiders held 5.92%. Keith Waddell, the vice chairman, president and chief executive officer, had the biggest stake among the insiders, with 1,300,774 shares.
Conclusion
Robert Half has earned its place on the Buffett-Munger list thanks to a good set of fundamentals and several metrics that indicate good value, such as the PEG ratio. And because it pays out nearly 100% of its free cash flow to shareholders, it could be a good prospect for investors looking for disciplined growth in the next five to 10 years.
