Robert Half Inc. (RHI), Large Cap AI Study of the Week

August 6, 2024

Weekly AI Pick from the S&P 500

Company Overview

Robert Half Inc. operates in specialized talent solutions and consulting services through its Robert Half and Protiviti brands, covering finance, technology, marketing, legal, and administrative support sectors. Founded in 1948, the company transitioned from a franchise model to owning its locations in 1986, enhancing operational control and uniformity. In 2022, Robert Half streamlined its various branded divisions to improve market presence and brand awareness. The company provides contract and permanent placement talent solutions, charging clients a fixed hourly rate for contract workers and a placement fee for permanent hires. Its subsidiary, Protiviti, established in 2002, offers consulting services and leverages AI to enhance talent matching and lead generation, positioning AI-enabled solutions as a future growth driver.

Robert Half focuses on direct customer engagement and affiliations with professional organizations in accounting, finance, technology, legal, and creative fields to enhance public recognition. The company also employs research-based content, media relations, and thought leadership to bolster its market presence. Protiviti markets its services globally, sharing insights through various programs and leveraging a broad partner ecosystem and digital advertising. Operating from 313 offices in the U.S. and internationally, and 65 global Protiviti offices, Robert Half competes on price and service reliability, with remote work acceptance and advanced AI technologies strengthening its competitive position. In 2023, the company conducted multiple surveys to enhance employee experience and emphasized training, development, and comprehensive compensation and benefits. Robert Half operates under various government contracts, though none significantly impact service revenues, and remains focused on regulatory compliance to mitigate financial risks.

By the Numbers

Annual 10-K Report Summary for Fiscal Year 2023:

• Service revenues: $6.39 billion (down 11.7% from $7.24 billion in 2022)
• Net income: $411 million (down 37.5% from $657 million in 2022)
• Diluted net income per share: $3.88 (down 35.7% from $6.04 in 2022)
• Contract talent solutions revenue: $3.90 billion (down 14.1%)
• Permanent placement talent solutions revenue: $567 million (down 21.7%)
• Protiviti revenue: $1.93 billion (down 2.5% from $1.98 billion in 2022)
• U.S. operations revenue: 77.5% of total revenue (down 13.2%)
• International operations revenue: 22.5% of total revenue (down 5.9%)
• Gross margin dollars: $2.58 billion (down 16.8%)
• Selling, general, and administrative expenses: $2.11 billion (down 0.5%)
• Income before income taxes: $577 million (down from $897 million in 2022)
• Cash and cash equivalents: $732 million (up from $659 million in 2022)
• Provision for income taxes: 28.7% (up from 26.6% in 2022)
• Share repurchases: 0.3 million shares at $26 million (down from 0.4 million shares at $38 million in 2022)
• Quarterly dividend announced: $0.53 per share

Quarterly 10-Q Report Summary for Q2 2024:

• Service revenues for H1 2024: $2.95 billion (down 12.1% from H1 2023)
• Net income for H1 2024: $132 million
• Diluted net income per share for H1 2024: $1.27
• U.S. real GDP growth: 2.8%
• Unemployment rate: 4.1%
• Q2 2024 total revenues: $1.47 billion (down 10.2% from Q2 2023)
• Contract talent solutions Q2 2024 revenue: $855 million (down 14.5%)
• Permanent placement talent solutions Q2 2024 revenue: $131 million (down 12.2%)
• Protiviti Q2 2024 revenue: $487 million (down 0.9%)
• Gross margin dollars Q2 2024: $576.7 million (down 12.6% from Q2 2023)
• Selling, general, and administrative expenses Q2 2024: $501 million (down 7.6% from Q2 2023)
• Income before income taxes Q2 2024: $96 million (down from $151 million in Q2 2023)
• Combined segment income Q2 2024: $92 million (down from $147 million in Q2 2023)
• Investment income from employee deferred compensation trusts Q2 2024: $16 million (down from $28 million in Q2 2023)

Stock Performance and Technical Analysis

The current technical analysis of the stock suggests mixed signals, as various indicators are presenting both positive and negative trends. With the current stock price of $63.25, it is 5 percent above its 52-week low, indicating some level of support or potential interest at lower price levels. However, the fact that it is 28 percent below its 52-week high suggests that there has been significant selling pressure or a change in sentiment from the peak price levels over the past year. This could be due to a variety of factors, including changes in the company's fundamental outlook, shifts in the sector, or broader market movements.

The recent daily volume is higher than the longer-term average (1,498,305 shares/day vs. 1,184,813.545 shares/day), which can suggest increased investor interest or volatility. A stable price over the last month indicates that the stock may have found a temporary equilibrium between supply and demand, but the 9.8% decline over the past three months could be a sign that the overall trend is negative. The Money Flow indicators pointing to moderate selling pressure reinforce this view, while the accumulation signal suggests that some investors might be seeing value at these levels and starting to buy the stock.

The Relative Strength Index (RSI), which measures the speed and change of price movements, indicates that the stock is neither overbought nor oversold, implying that the stock is trading within a normal range without extreme investor sentiment driving the price too high or too low. Lastly, the Moving Average Convergence Divergence (MACD), which is a trend-following momentum indicator, is bearish at -0.27. This suggests that the stock might continue to see downward momentum in the near term, which could be a concern for potential investors looking for immediate growth. However, for value investors or those with a longer-term horizon, the accumulation signal and the price being above its 52-week low could present an opportunity if they believe the stock has been oversold and the company’s fundamentals are strong. As always, it is important to complement technical analysis with a review of the company's fundamentals, market conditions, and any recent news or events that could affect the stock's performance.

The ‘Bull’ Perspective

Title: Why Robert Half Inc. (RHI) is a Buy Despite Economic Headwinds

Summary:

1. Resilient Business Model: Despite a 12.1% dip in service revenues, RHI's diversified portfolio and strategic investments in AI and technology position it for a rebound.
2. Gross Margin Stability: RHI's gross margin percentage remains robust at 39.2%, indicating efficient cost management even amidst revenue declines.
3. Strategic Cost Reductions: A 7.6% decrease in SG&A expenses reflects RHI's agility in adjusting operational costs to align with current market conditions.
4. Protiviti's Consistent Performance: Protiviti, RHI's consulting segment, shows resilience with U.S. revenues growing by 3.3%, despite a slight overall revenue decrease.
5. Market Trends and Economic Indicators: With the Fed signaling potential rate cuts and a tight labor market, RHI is well-positioned to capitalize on the eventual economic recovery.

Elaboration:

1. Resilient Business Model:
   Robert Half Inc.'s recent 12.1% decline in service revenues to $2.95 billion for the first half of 2024 is not a sign of long-term distress but rather a reflection of the broader economic challenges that have impacted many industries. The company's investment in AI and technology is a strategic move to enhance its talent solutions, which is critical for long-term growth. The tech-enhanced services will likely lead to improved matching of candidates and employers, higher productivity, and eventually, increased market share. Furthermore, RHI's diversified business lines, including temporary and permanent staffing services and risk consulting through Protiviti, provide multiple streams of revenue that can weather economic fluctuations.
2. Gross Margin Stability:
   Despite a decrease in total revenues, RHI's gross margin percentage remains solid at 39.2%. This indicates that the company has been effective in managing its cost of services sold. A gross margin that remains relatively stable in the face of declining revenues is a testament to the company's operational efficiency and pricing strategy. This financial discipline is crucial for maintaining profitability during economic downturns and positions RHI for improved financial performance when market conditions rebound.
3. Strategic Cost Reductions:
   Robert Half's proactive approach to reducing selling, general, and administrative (SG&A) expenses by 7.6% demonstrates its commitment to aligning costs with the current revenue environment. This strategic cost control enhances the company's ability to maintain a healthy bottom line. By keeping SG&A expenses in check, RHI is better positioned to invest in growth opportunities and weather economic headwinds, making it a more resilient investment in the long run.
4. Protiviti's Consistent Performance:
   The Protiviti segment is a bright spot in RHI's portfolio, with U.S. revenues increasing by 3.3%. This growth, despite a minor 0.9% dip in overall Protiviti revenues, underscores the segment's competitive strength and its ability to attract and retain clients. Protiviti's focus on risk consulting and internal audit services is particularly relevant in the current environment, where companies are increasingly concerned about risk management and regulatory compliance. This consistent performance supports the case for RHI's stock as a buy, given Protiviti's potential to continue contributing positively to the company's earnings.
5. Market Trends and Economic Indicators:
   The current economic indicators and market trends present a mixed picture but offer a silver lining for RHI. With the Federal Reserve hinting at upcoming rate cuts, businesses may soon experience lower borrowing costs, potentially leading to increased investment and hiring activities. Additionally, the tight labor market, evidenced by the high job openings despite increased unemployment rates, suggests that there is still strong demand for staffing services. RHI, with its established brand and extensive network, is well-positioned to benefit from these trends as the economy begins to recover.

In conclusion, while Robert Half Inc. faces challenges due to the broader economic slowdown, its strategic investments, operational efficiency, and strong positioning in the consulting market make it an attractive buy for investors looking for a resilient company with long-term growth potential. The anticipated easing of monetary policy and persistent demand for staffing and consulting services further bolster the case for investing in RHI.

The ‘Bear’ Perspective

Title: The Case for Caution: Why Investors Should Steer Clear of Robert Half Inc.

Summary:

1. Declining Revenues and Net Income: Robert Half Inc. reported a 12.1% decrease in service revenues and a significant drop in net income, reflecting broader economic challenges that could persist.
2. Labor Market Uncertainties: The rising unemployment rate and a tight labor market indicate potential headwinds for staffing firms like Robert Half, potentially impacting demand for their services.
3. Operational and Margin Pressures: Operational challenges, including a decline in gross margin dollars and percentage, highlight increased financial pressure on the company.
4. Risks from Economic and Political Instability: Macroeconomic uncertainties, political instability, and regulatory changes could further destabilize Robert Half’s international operations.
5. Technological Investment Risks: Investments in AI and technology, while necessary, carry significant risks and may not yield returns in the short term, adding to the company's financial burden.

Elaboration:

1. Declining Revenues and Net Income:
   Robert Half Inc.'s latest financials are a red flag for investors, with service revenues plummeting by 12.1% to $2.95 billion in the first half of 2024 compared to the previous year. Net income also took a hit, dropping to $132 million, equating to a diluted net income per share of $1.27. This downward trend is not an isolated event; it reflects a consistent decline in both U.S. and international revenues, which fell by 9.6% and 12.2%, respectively. When a company's top and bottom lines are both shrinking, it's a clear signal of underlying challenges that may not be resolved quickly, especially in a business as sensitive to economic fluctuations as staffing.
2. Labor Market Uncertainties:
   The labor market is a crucial barometer for staffing firms like Robert Half. With the U.S. unemployment rate ticking up to 4.1%, and a tight labor market, the company faces an uphill battle. High job openings may suggest future demand, but they also indicate a possible mismatch between the available roles and the skills of job seekers, which can limit Robert Half's ability to place candidates. Furthermore, the company's reliance on contract talent solutions, which saw a 14.5% revenue drop, is concerning given the 14.8% decrease in hours worked. These figures underscore the volatility and unpredictability of the staffing industry, which is directly tied to economic health.
3. Operational and Margin Pressures:
   Operational efficiency and profitability are under scrutiny at Robert Half, with gross margin dollars for contract talent solutions falling by 15.7% and the gross margin percentage dipping slightly. These pressures are compounded by a 12.6% decrease in total gross margin dollars across all segments. When you factor in the increased selling, general, and administrative expenses as a percentage of revenues, it becomes evident that Robert Half is facing a squeeze on its profitability, which could spell trouble for future earnings and cash flow.
4. Risks from Economic and Political Instability:
   Robert Half's international operations expose it to risks that are beyond its control, such as political instability and fluctuating currency values. With international revenues already on the decline, these external factors could exacerbate the company's financial woes. Moreover, the current geopolitical climate and regulatory shifts pose significant threats that could disrupt operations and further erode investor confidence. In an industry where global reach is vital, these risks cannot be ignored.
5. Technological Investment Risks:
   While Robert Half is wise to invest in AI and technology to stay competitive, these investments are not without risk. The company is adjusting its headcount based on anticipated revenue growth and productivity metrics, which could lead to short-term financial strain if the anticipated benefits do not materialize promptly. Moreover, the integration of AI into business processes carries operational challenges, legal liabilities, and privacy concerns that could lead to additional costs and compliance issues. Given the company's current financial trajectory, such investments must be managed with extreme caution to avoid further financial strain.

In conclusion, while Robert Half Inc. is taking steps to navigate through a challenging economic landscape, the combination of declining revenues, labor market uncertainties, operational pressures, and external risks paint a picture of a company facing an uphill battle. As an investment advisor with a bearish outlook, I would advise clients to exercise caution and consider these factors before making investment decisions regarding Robert Half's stock.