Can Robert Half's Growth Drivers Offset Protiviti Weakness?

Robert Half International Inc. (NYSE:RHI) has been struggling with underlying weakness in Protiviti segment and sluggish domestic hiring trends. These factors also weighed on the company in third-quarter 2017, wherein earnings and sales declined year-over-year for the fifth straight quarter. However, the company is encouraged with the improving trends in the U.S. market.

Further, the company has managed to stay afloat, courtesy of strong international operations and constant investments in technology up-gradation initiatives. Evidently, shares of this Zacks Rank #3 (Hold) company have surged 24% in the past three months, almost in line with the industry’s rally of 25.4%.

Let’s now delve into the factors that have been impacting Robert Half’s performance lately.

Soft Protiviti Segment & Escalated Costs

Protiviti is the wholly-owned subsidiary of Robert Half, offering varied risk consulting and audit services. Of late, the segment has been depicting weakness due to declining margins and fewer high-margin clients. During the third quarter of 2017, Protiviti’s revenues declined about 4% to $209 million, primarily stemming from weak trends in the United States. Despite a stable U.S. economic environment and a stronger job market, the hiring cycle continues to be lengthy as employers take more time to make hiring decisions. This is negatively affecting the company’s profits. Further, gross margin in the segment contracted 130 basis points to 29.6% during the quarter, severely affecting the company’s profits.

The company has also been incurring increased selling, general and administrative (SG&A) expenses owing to higher staffing costs. Further, management expects SG&A deleverage, on account of costs related to IT initiatives, increased head count and higher compensations, especially outside the United States.

The Driving Factors

Nevertheless, the company has been witnessing strength in international hiring, driven by increasing demand for its professional staffing services. This, in turn has encouraged Robert Half to steadily invest in technology improvements. Major software initiatives include upgrades to enterprise resource planning applications and the implementation of a global, cloud-based customer relationship management application.

Further, the company continues to invest in digital technology initiatives designed to enhance the service offerings to clients and candidates. In this regard, Robert Half concluded the global rollout of its CRM software in 2017, while it also launched a website recently. Notably, international revenue growth, mainly from European regions, provided some cushion to Robert Half’s soft revenues in third-quarter 2017.

While Robert Half’s U.S. revenues were soft in the third quarter, management noted that trends improved in September which continued till October. Further, management is optimistic about the overall improved economic scenario. The increased economic activity in the United States and an optimistic growth view for 2017 give out positive signals for Robert Half’s business.

Looking For More? Check These Three Picks

Investors may also consider better-ranked stocks from the same sector such as Automatic Data Processing Inc. (NASDAQ:ADP) , Blucora Inc. (NASDAQ:BCOR) and Broadridge Financial Solutions, Inc (NYSE:BR) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Automatic Data Processing delivered an average positive earnings surprise of 4.5% in the trailing four quarters. It has a long-term earnings growth rate of 10%.

Blucora pulled off an average positive earnings surprise of 23.7% in the trailing four quarters. It has a long-term earnings growth rate of 20%.

Broadridge came up with an average positive earnings surprise of 12.8% in the trailing four quarters. It has a long-term earnings growth rate of 10%.

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