ManpowerGroup (MAN): Sell Rating Amidst Uncertain Macroeconomic Outlook
Investment Summary
I recommend a sell rating for ManpowerGroup (NYSE: MAN) due to my lack of confidence in a recovery in the coming months given the uncertain macroeconomic conditions. Businesses are unlikely to restart their hiring momentum amidst this uncertainty, leading to a continued decline in MAN’s revenue and stronger negative operating leverage as fixed costs represent a larger portion of revenue.
Business Overview
MAN provides staffing services, including temporary staffing, contract staffing, permanent work placements, and more, to a wide range of industries across various regions. Its scale, with $18.6 billion in revenue over the past 12 months, enables it to efficiently source candidates and establish relationships with hiring departments.
1Q24 Results Update
Released on April 18, 2024, MAN’s 1Q24 revenue fell 7.3% to ~$4.4 billion, missing consensus expectations for a 6.7% decline. Adjusted for FX, revenue fell 5.5% year-over-year (y/y), accelerating the decline of 5.2% from 4Q23. Geographically, on a constant currency basis, Southern Europe fell 4.9% y/y, Northern Europe fell 12.1%, the Americas fell 1.1% y/y, and APME fell 4.8%. Only the Americas saw sequential improvement in y/y decline (1.1% in 1Q24 vs. 4.5% in 4Q23), suggesting little to no evidence of recovery growth.
At the profit line, EBITA margins fell 100 bps to 1.8%, reflecting negative operating leverage. EPS came in at $0.94, beating consensus of $0.91, but this is mainly due to the lower tax rate (27.9% in 1Q24 vs. 32.7% in 4Q23 and 28.9% in 1Q23).
Operating Conditions Remain Weak
Despite early signs of improvement, such as the stabilization of demand for temp staffing in key markets and positive staffing trends in LatAm and APME, I believe the current operating conditions make the outlook for MAN’s recovery uncertain and gloomy. This one-quarter of stability does not constitute a trend in my opinion.
Just a few months ago, the market was confident in the Fed cutting rates by 75bps (3 cuts) by December. However, due to sticky inflation and a hot labor market, this has become increasingly unlikely. The Fed has acknowledged this fact, introducing another round of uncertainty for businesses as they await signs of sustainable economic improvement before ramping up hiring.
As such, I expect MAN to continue facing growth headwinds as businesses in its key regions (Europe and North America) remain cautious in their hiring. The data from 1Q24 supports my negative narrative. The rate of decline in constant currency revenue growth increased from 5.2% y/y in 4Q23 to 5.5% in 1Q24. Management has indicated that they have not yet seen a positive inflection point in temp staffing demand, making it difficult to predict when revenue will recover.
Earnings
Negative operating leverage could accelerate from here, as fixed costs represent a larger portion of revenue. As revenue continues to decline, adjusted EBITA margins have fallen accordingly. Given the ongoing macro uncertainty, I don’t see a strong inflection in revenue growth anytime soon; instead, businesses are likely to remain conservative, potentially leading to further revenue decline.
Internal Initiatives
Encouragingly, MAN is working to improve the efficiency and productivity of its technology and finance departments in the medium to long term. Initiatives like the establishment of a worldwide business services center in Portugal and the rollout of PowerSuite, a cloud-based platform for front and back offices, are positive steps.
Balance Sheet
MAN has a strong balance sheet to weather the near-term volatility, with cash and cash equivalents of ~$604 million and total debt (excluding leases) of $984 million, resulting in ~$380 million of net debt (just 0.4x LTM EBITDA). The company can easily cover its expected dividends (c. $2.96 per share) with its current cash balance, eliminating the risk of a dividend cut.
Valuation
Using a forward EBITDA approach, I believe MAN is worth $59. I expect revenue to continue declining in FY24 due to the uncertain macroeconomic conditions. Management’s updated guidance for 2Q24 suggests a constant currency decline of 2 to 6%, but considering the strong USD movement since April, I anticipate another 300bps of headwinds, leading to an adjusted reported revenue guide of -5 to -9%. I assume FY24 revenue will come in at the high-end of the guide, expecting some economic recovery as the Fed cuts rates in the coming months.
As revenue declines, MAN’s EBITDA margins are likely to decline as well due to negative operating leverage. Valuation should continue to trend at ~7.2x forward EBITDA, similar to industry peers given their comparable growth outlook.
Risk
The upside risk to my sell rating is a faster-than-expected rate cut by central banks in MAN’s key regions, driving a strong economic recovery and increased demand for MAN’s services. Consequently, EBITDA growth would increase, and the market would likely drive up valuation multiples.
Conclusion
I recommend a sell rating for MAN due to the uncertain economic outlook, which is leading to cautious hiring by businesses, declining revenue for MAN, and negative operating leverage. While MAN is taking steps to improve efficiency and has a strong balance sheet, these factors are not enough to offset the near-term headwinds from the macro environment.
