Staffing Companies KO Consulting Businesses in the Public Market Ring

A couple years ago, public staffing companies were trading at a 50% discount compared to consulting firms based on median LTM revenue multiple, and a 16% premium based on median LTM EBITDA multiple. However, our recent analysis shows that staffing companies have run ahead of consulting businesses.  As shown below, LTM EBITDA multiples of staffing companies now exceed that of consulting companies by 43% while revenue multiples only trail by 33%. This comparison and trend is noteworthy given the median EBITDA margin of staffing companies is approximately half of what consulting companies generate.

The economy is growing again and business activity is generally sound. However, this shouldn’t disproportionately benefit staffing companies relative to consulting businesses to this magnitude. We believe there are other factors driving a fundamental market shift and propelling staffing companies to this level of valuation. The market expects robust growth for staffing businesses due to companies increasingly moving towards a flexible workforce and employers. Small businesses, which account for 55% of the country’s jobs, are unsure about the impact of the Affordable Healthcare Act.

According to a recent survey by McKinsey that asked: “In what ways will your company’s workforce change over the next five years?” nearly 40% of respondents expect more of their workforce to consist of part-time and temporary employees. This research is consistent with the temporary unemployment penetration rate (the amount of temporary help jobs divided by total nonfarm employment) reaching an all-time high of 2.06%, compared to the previous record of 2.03% achieved in May of 2000. Many businesses still have bruises from the last recession, and controlling fixed costs is a relatively easy method to drive earnings and remain nimble.

There are many differing opinions on the Affordable Care Act (the “Act”), but we are not taking a position on the law. That said, our market intelligence indicates that most small businesses have angst about the Act’s impact on healthcare insurance prices and the cost of hiring additional employees. However, CEOs and entrepreneurs want to grow their businesses and must hire additional talent to do so. One easy option to drive revenue while soothing the angst created by the Act is, to state the obvious, expand their workforce through temporary agencies.

We believe these trends will endure and public staffing companies will continue to enjoy attractive valuation multiples for quite some time. The industry remains highly fragmented and we fully expect consolidation to accelerate over the next few years. The overall M&A market currently favors sellers but it will be even more lopsided for staffing companies if the public market continues to behave the way we expect it to. In addition, this fundamental market shift may propel consulting companies to acquire specialized staffing businesses, creating a blurry line between the staffing and consulting industries.