Staffing Companies Outperform Market as Europe Economic Outlook Stabilizes
Euro-area and U.K. staffing companies are outperforming the market, a signal that investors predict economic conditions in the region won’t be as bad as previously forecast.
Adecco SA (ADEN), the world’s largest provider of temporary employees, has risen 19 percent since Dec. 30, while the Stoxx Europe 600 Index gained 8 percent. Shares of Hays Plc (HAS), a London- based recruiting company, are up 29 percent compared with 5.2 percent for the FTSE 100 Index.
Investors are buying stocks in this and other cyclical industries they were previously cautious about amid some reassurance “the environment is not as bad as they thought before,” said Vincent Treulet, head of strategy at BNP Paribas Investment Partners in Paris.
While the European Commission has forecast the euro-area economy will contract this year, recent indicators “confirm signs of a stabilization” as the “risk environment has improved enormously,” European Central Bank President Mario Draghi said yesterday. One of these signs is the third consecutive monthly increase in the manufacturing gauge of an index based on a survey of euro-area purchasing managers.
The gauge -- a leading indicator of improvement, according to Howard Archer, chief European economist at IHS Global Insight in London -- was 49 last month, the highest since August and in line with a Feb. 22 estimate, even though a reading below 50 still indicates contraction, Archer said.
Recent news from the U.K. also shows progress, he said. Manufacturing and services continued to expand in February, while construction output rose at the fastest pace in 11 months, according to reports from Markit Economics, a data provider in Henley-on-Thames, England. Consumer confidence held last month at the highest level since June, London-based market researcher GfK NOP Ltd. said Feb. 29.
The economic recovery still is “likely to be tough going and subject to relapses,” Archer said. Gross domestic product in the 17-nation euro area fell 0.3 percent in the fourth quarter from the prior quarter, the first contraction since 2009, while U.K. GDP dropped 0.2 percent, preliminary data show. Unemployment also remained elevated, at 8.4 percent in the U.K. for December and 10.7 percent in the euro area for January.
The euro region will contract 0.4 percent this year and the U.K. will expand 0.45 percent, according to the median estimates of economists in Bloomberg surveys.
‘Could be Justified’
Even so, the recent rally in staffing stocks “could be justified” amid some clarity about the European sovereign-debt crisis, said Konrad Zomer, an analyst in London at Berenberg Bank. Greece’s parliament ratified a 3.2 billion-euro ($4.2 billion) package of spending cuts to its 2012 budget last week after European governments granted the country its second bailout Feb. 21 to prevent a financial collapse in the region.
The euro area is “likely to survive,” which “bodes relatively well for staffers,” said Zomer, who maintains “buy” recommendations on Adecco, temporary-employee provider Randstad Holding NV (RAND) and Sthree Plc. (STHR), a London-based information, communication and technology staffing service.
Stock prices may reflect “a scenario which is too optimistic,” said Paul Jones, an analyst in London at Panmure Gordon UK Ltd., who has a “sell” recommendation on Sthree.
‘Disconnected’ From Fundamentals
Staffing companies’ outperformance can remain temporarily “disconnected” from fundamentals, including revenue growth, that haven’t reflected sustained improvement yet, Treulet said. That’s because cyclical industries often rally before demand picks up, according to Emmanuel Cau, a strategist at JPMorgan Chase & Co. in London. Staffing is “early cycle,” meaning its stocks will benefit as economies strengthen and companies hire more employees, he said.
Business slowed in January, with Glattbrugg, Switzerland- based Adecco reporting a 1 percent decline from a year earlier in organic growth, before the impact of exchange rates and acquisitions or disposals. Randstad also experienced a “gradual slowdown” across Europe that month, the company said in a Feb. 16 statement.
A large portion of staffing agencies’ costs are fixed, implying a high operating leverage, so any improvement in sales causes a disproportionate boost to profits, according to Jones. Such leverage attracts investors who are more optimistic about the future, Treulet said.
Another appeal is the companies’ exposure beyond Europe, which helps investors to be less risk averse about owning their stocks, Treulet said. The U.S. jobless rate held at 8.3 percent last month, a three-year low, from as high as 10 percent in October 2009, and companies added 227,000 workers to payrolls, according to data released today by the Bureau of Labor Statistics.
Investors probably aren’t anticipating a similar labor- market recovery anytime soon in the U.K. and euro region, because that would depend on sustained economic improvement, Treulet said.
Given the uncertain outlook, companies may be “very careful about taking on extra staff and will probably try to eke out as much as possible from their existing workforces,” Archer said. Signs of progress in employment, a lagging indicator, are “still pretty thin on the ground.”
Once the U.K. and euro-area economies signal “the worst may be over,” economically-sensitive stocks such as staffing will rally even more, Jones said. “They move like the wind when things improve, but that still looks some way off.”
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