DAVOS: Why Adecco Still Is Just the Job

Recruitment services provider Adecco (AHEXY) has sound prospects, despite the difficult environment for the global economy.

If some of this sounds familiar, that�s because Adecco was touted as a Buy in Barron�s European Trader column Nov. 26. At that time, we said the shares could reach 56 Swiss francs ($56.74) in 12 months, a return of about 25%. In the two months since then, the stock has popped 16%, closing Wednesday at 52.75 Swiss francs.

That price target now looks conservative, especially if the global economy strengthens faster than expected. Analysts� consensus price target is 53.39 Swiss francs, although some estimates range as high as 65 Swiss francs.

Why the renewed sense of optimism? Fundamentally, Adecco is well placed as companies look to cut costs and retain flexibility in labor.

�Our industry now is becoming a strategic part of the work force,� says Chief Executive Patrick de Maeseneire on the sidelines of the World Economic Forum in Davos, Switzerland. That�s encouraging for market leader Adecco, which is finely tuned to maximize profit in a low-growth environment.

Adecco’s revenue is forecast at 24.83 billion Swiss francs in 2012, down from 25.33 billion Swiss francs in 2011. Its margin of earnings before interest, tax and amortization in the third quarter of last year was 4.4%, an indication of the progress it is making, although it still is some way off its midterm target of 5.5%.

Management has earned plaudits from investors and analysts for assessing the economic cycle correctly and avoiding the mistakes typically associated with the recruitment industry: making acquisitions at the wrong time or the wrong price, accumulating too much debt, and overstaffing.

Another positive is a 400-million-euro ($532 million) share buyback announced last summer that is far from completed. Adecco has repurchased only about EUR150 million of stock due to low trading volumes, says Chief Financial Officer Dominik de Daniel. �This will go on,� he says. �We are in the market. Over the course of this year, we should conclude this.�

That could give the stock a bit more fizz.

The stock trades at 13.9 times forecast 2013 earnings of 3.78 Swiss francs per share, compared with an estimated 3.28 Swiss francs in 2012. Rivals Randstad Holdings (RANJY) and ManpowerGroup (MAN) trade at multiples of 14.7 and 16.4 times, respectively.

Adecco�s shares yield a tempting 3.4%, which looks solid. It has no plans for major acquisitions for a couple of years, freeing up more cash to reward shareholders. In contrast, Randstad pays 4.1%, but has signaled it won�t be as generous in future. Manpower yields a paltry 1.8%.

Investors may want to recruit Adecco, if they haven�t already.