This post began by searching for stocks hitting their 52 week
low. The DHI Group DHX reached its 52 low on Monday 04/03/17. At $3.90 it offered investors value. Then, the stock (DHX) moved up over the next few days as I prepared this post. DHX closed Friday (04/07/17) at $4.50.
The DHI Group (DHX) is a micro-cap with historical and impressive,
consistent high FCF margins that the market forgot. Revenue growth challenges
from a difficult specialized job market and increased competition (mostly perceived) chased away the original shareholder base of magic formula growth
investors. This overlooked investment has an asset light business model that consistently generates the staffing
industry's highest FCF yields. Also,coupled with its aggressive, opportunistic
share buybacks, debt reduction and activist interest the stock offers longer
term value investors a tempting opportunity.
Profile:
DHI Group (DHX) offers employment related professional
connections through several specialized job recruitment websites. Additionally, their software
services access, search and analyze their proprietary resume databases. These targeted professionals
work within technology, financial services, energy, healthcare and the hospitality
industries. Above all, the goal is to allow professionals and organizations to
access proprietary data to compete for employment connections. Employers and
recruiters use their websites and services to find the most qualified
professionals within their skilled occupations. Individual professionals use
their websites and services to find the best jobs, industry news, detailed
salary information, and expand networking opportunities.
Their online recruitment packages target the difficult to
fill employment categories experiencing a scarcity of skilled professionals relative
to market demand. These online marketplaces are where employers and recruiters
find employees. Professionals use the services to find job postings, news,
career development and recruiting services. It's DHI Group (DHX) of recognized
web sites, quality and size of its database of industry candidates that creates
a competitive advantage. Last, DHI (DHX)
has been in the recruiting and career development business for over 26 years.
Based on FASB accounting rules DHI has three reportable segments;
Tech and Clearance (Dice, Dice Europe and ClearanceJobs); Global Industry Group
(eFinancialCareers, Rigzone, Hcareers and BioSpace); Healthcare (Health eCareers).
The remaining other services and activities individually are less than 10% of consolidated
revenues, operating income or total assets.
Most of the revenues come from employers and recruiters who
pay a monthly or longer-term contractual agreements for recruitment
packages. These packages offer a combination
of website job postings and access to their database of resumes on Dice,
Rigzone, eFinancialCareers, ClearanceJobs, Health eCareers, BioSpace and
Hcareers.
This post will not be an operational deep dive. Or an analysis of the recruitment industry.Instead I will use DHI’s historical and competitors’ financial results for my
investment case to justify its deep relative and historical valuation discount.
Current Valuation per Yahoo Finance as of 04/07/17:
Market Cap= 272.67M, Enterprise Value = 272.67M, EV/EBITDA = 5.79, 52 week change = -45.30%,YOY revenue change -15.60%, Gross Profit Per Share = 3.92, Price Per Share on 04/07/17 =$4.50
Noteworthy comments on the below historical valuation table.
A consistent high FCF margin, current gross profit per share near its current market price.
A consistent high FCF margin, current gross profit per share near its current market price.
An aggressive share count and long term debt reduction compares favorably to a mean reverting attribute , an unjustified enterprise value drop of 44% from 2013.
Historical low valuation for EV/GP at 1.36 versus the average of 2.42 over 2013 to 2016. EV/Revenue also at historical low valuation.
DHI Group Versus 15 Staffing Industry Peers
Price Performance: Annualized 3-year stock return is -14.78% versus the +2.13% for the comparable 15 staffing peers, YTD% stock return is negative -29.60% versus industry average of positive +2.78%.
The Enterprise value dropped -44.89% from 2013 versus the industry's positive +19.55% over the same 3-year period.
DHI Group's FCF and Gross margins trounce its industry peers. TTM GM% is +85.85% versus industry +36.61%, FCF margins for the TTM is 14.19% versus the industry TTM average of 3.17%, 3 year (2013 to MRQ) average FCF margins is 16.68% versus the 3-year industry average of 4.16%.
Vigorous capital structure improvements with reduction in shares outstanding and debt from 2013 to the MRQ. Long Term Debt per share for 2013 to the MRQ reduced by 16.67% versus the industry increasing long term debt by 46.22%. Over the same 3-year period 2013 to MRQ shares outstanding reduced by 7.74% versus the industry .79%. See below supporting table
Industry Analysis
Risk:
LinkedIn's increased entry into the recruitment market is an industry concern. This along with other competitors will impact pricing and growth.
A recession or weak economic growth.
An ill-conceived or poorly integrated acquisition pressured by the need for growth.
Subscriber decline will impact the brands value and pricing power.
Recent insider selling.
Opportunities:
An attractive absolute and relative valuation. Mean reverting candidate with a valuation gap and the industry's worst performing stock price. Valuation at 5 year low for P/B,P/S, and stock price returns.
A history of sound capital allocation with management correctly weighing the benefits of acquisitions, technology improvements, debt reduction or share buybacks.
In the fourth quarter of 2016, announced a decision to explore strategic alternatives. A financial advisor retained to aid its exploration of strategic alternatives.
Long: DHX
