(By Mani) On Assignment, Inc.
) has the three exposures of a good staffing company namely IT, healthcare, and strong management, and investors are getting these optimal exposures at an attractive relative valuation.
On Assignment is a market share gainer in the two fastest growing staffing disciplines in the coming 3-4 years: IT staffing and healthcare staffing. Healthcare reform should accelerate the job growth of healthcare overall, and have a positive impact on healthcare staffing demand.
In addition, IT staffing is benefiting from the acceleration of technology innovation and thus the required implementation and systems upgrades.
"On top of 100% exposure to these staffing disciplines, we believe ASGN is a market share gainer. Strong execution by management should mean ASGN outperforms market growth and delivers strong bottom line results," Deutsche Bank analyst Paul Ginocchio said in a client note.
Healthcare staffing is less correlated to the economy due to the structural changes happening in the market, and IT staffing has been the most consistent and fastest growing staffing discipline in this cycle. Meanwhile, scarcity of talent should mean that IT staffing can further decouple from decelerating US GDP and maintain solid growth rates.
"ASGN's focus on recruitment should also enable it to outperform the competition in tight labor markets," Ginocchio said.
On Assignment provides short-term and long-term assignments of contract professionals, contract-to-permanent placement and direct placement of high skilled professionals. In May 2012, On Assignment expanded its reach in IT staffing with the acquisition of Apex Systems. The company bought Apex Systems for a very attractive price, and Apex's operational excellence should provide upside to expectations over time.
Since Peter Dameris took leadership of the company in 2004, the company has become more acquisitive. On Assignment has acquired 7 companies since 2007, with a total purchase price of $911 million, which is 70 percent of the current enterprise value of $1.31 billion.
"We think future acquisitions will be focused on building up two divisions: the physician staffing and the life science divisions," the analyst noted.
On Assignment's EBITA margin and conversion ratio dropped significantly to negative in 2004. However, the company kept improving the two ratios and has been above both specialist averages and generalist averages since 2008.
"We think the higher the conversion ratio, the more efficient a staffing company is and the better they are at executing their strategy,"Ginocchio added.
For the second quarter, the company reported net income of $8.5 million, or 19 cents a share, higher than $5.9 million, or 16 cents a share, last year. Revenue surged 97 percent to $283.2 million.
On Assignment sees third quarter earnings of 28 to 31 cents a share on revenue of $382 million to $388 million. Wall Street expects earnings of 29 cents a share on revenue of $386.97 million, according to analysts polled by Thomson Reuters.
For the next five years, the company's average earnings growth are expected at 25 percent, compared to S&P 500's 10 percent.
All the six analysts covering the company have rated it as "strong buy" or "buy," which is an indication of the confidence of the Wall Street on the company.