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Staffing Stocks Trading Too High?

Staffing Stocks Trading Too High?

Despite tantalising signs of a recovery among European staffing firms such as Adecco and Randstad, analysts warn that they are trading at too high a price given the likelihood of persistent economic weakness.

Staffing companies, sensitive to economic conditions, are reflecting investor expectations of a V-shaped recovery on both sides of the Atlantic.

"Sector price-earnings are very high," said Keijser Capital analyst Herman Huizinga, who has a "sell" on Randstad, as well as for its smaller Dutch rival USG People. "Real economic growth in Europe is coming from exports ... but the United States will be in a long recession."

Adecco, the world's largest staffing firm, has recovered nearly two-thirds of its sharp 2008 sell-off and is now trading at 24 times projected 2009 earnings.

Dutch staffing company Randstad, Adecco's nearest rival, is trading at 26 times 2009 estimates, with the shares recovering all of their drop since early 2008, when the financial crisis triggered the global recession.

Historically, sector price-earnings have usually been at 15 for the recovery phase of the business cycle. Currently, the index as a whole trades at around 16.7.

"I have a feeling the onslaught is yet to come," Huizinga said.

Eight analysts tracking Randstad have a "hold", "sell" or "underperform" rating, compared with five with a "buy" or "outperform" rating, according to recommendations compiled by Reuters. The picture is the same for Adecco and USG People, both of which also have a high margin of analysts with bearish recommendations.

Euro zone unemployment, which reached a ten-year high of 9.4 percent in June, is expected to peak at 10.8 percent next year, according to the latest Reuters poll.

The main issue is whether economies will recover sharply or see another dip.
"The big question is where is the trend going to be in the future," ING economist Charles Kalshoven said. "We cannot rule out the possibility of a W-shaped recovery, the risk is there."
The Monster Employment Index, a measure of job openings tracked by the online jobs website that is also watched closely by analysts, fell for the fifth straight month to 101 in July. A year earlier, it was at 167.

One reason for optimism in the staffing sector is an uptick in the index in France, The Netherlands and Britain against the backdrop of economic growth in Germany and France in the latest quarter. Monster's index for Germany, however, worsened in July.

Lars Weigl, global managing partner for performance improvement services at Ernst & Young, believes the recovery is likely to come in waves.
"My personal opinion is that we will see a recovery in demand, followed by a drop and then another upturn," Weigl said "A lot of the signals we are getting are positive, but I wouldn't rule out setbacks in certain industries, such as industrials, building infrastructure, construction and engineering."

One reason why expectations may be running high is the similarity to the last cycle bottom eight years ago when staffing companies began their recovery well before other signals pointed in the same direction.
"The moves have not been unusual. When we look back at the last peak of 2002 and the last trough of 2001, there was a 120 percent rise in Adecco stock. It is normal to see such sharp moves in the sector," said Sal. Oppenheim analyst Urs Diethelm.

Companies are also likely to employ more temporary workers in the mid-term than they did before the crisis as they aim to have more flexible cost structures in place, Kepler Capital Markets analyst Fabian Baumann said.
"There will structurally be higher demand as companies want a higher proportion of temporary workers compared to permanent staff," Baumann said.

"It is interesting that most European analysts have 'sell' ratings on the larger staffing stocks, like Adecco, Randstad and Michael Page but shares have continued to rise," Sal. Oppenheim's Diethelm said.


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