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HireQuest HQI: Asset light franchising, strategic acquisitions, profitable growth driven by talented management with skin in the game.

Thursday, November 14, 2024 2:08

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HireQuest (HQI)

Price = $14.48: Market Cap = 200.16M : Enterprise Value = 215.19M

P/B = 3.04: EV/Revenue = 5.80 : EV/EBITDA = 19.26

HireQuest (HQI) is a fast-growing national staffing franchisor with a proven, profitable asset-light model. It has impressive historical operating margins and strong free cash flow. The CEO’s net worth is invested in +22% of HQI’s outstanding shares. His total HQI investment is 44 million, and he often makes open market purchases.

The staffing industry is highly fragmented. And HQI has aggressively made strategic acquisitions, buying smaller competitors and integrating them into its franchise model. Refranchising acquired companies boosts profits by lowering the capital requirements, costs, and operating risk.

Top-line growth is evident. Revenue per share increased by 126.22% from the 2021 balance of 1.15 to the trailing twelve-month balance of 2.61. Profitability has materially grown. Per share, retained earnings, and book value grew by 283.09% and 87.54%, respectively, from 2021 to the current trailing 12 months. These value-increasing attributes have significantly outperformed its stock price performance, offering a mean reversion opportunity in addition to expanding multiples and value from additional growth. HQI’s price per share declined -23.01 % from the year ending 2021 to the current price of $14.25, contrasted to the material per share value improvement in retained earnings, book value, revenues, and a forward dividend yield of 1.68%. HQI declared a .06 dividend for shareholders of record 12/2/24.

See the table below for historical financial performance.

Relative valuation using the NAISC code 561311 (employment placement agencies) for 14 companies.

HQI has the highest EBITDA margins, 30.11%, versus the NAISC (561311) average of -12.37%. The second-highest EBITDA margin was KFY at 12%. Sixteen insider buying transactions over the prior 12 months for HQI versus a medium of zero or three companies with one or two small insider purchases. Institutional ownership is 12.10% for HQI versus the average 60% for NAISC(561311). HireQuest’s CEO purchased 18,459 shares in the open market in 2024 for $230,603 at an average price of 12.49. HQI directors purchased 7,000 shares for $89,080 at an average price of 12.73 in 2024. Since 2019, HQI insiders bought 346,889 shares for $3,216,348 at an average price of $9.27, with zero insider selling. Operationally, HireQuest consistently outperforms its peers!

A brief review of the most recent earnings for Q3 2024.

Revenue growth for Q3 2024 slowed to 1.60% year over year to $9.4 million, and sequential revenue growth was 8.5% compared to the second quarter of 2024. Temporary staffing brands grew by 3.6%, their first year-over-year growth since early 2023. Due to significant reductions in workers’ compensation expenses, down 67% from last year, SG&A expenses dropped by +15% from Q3 2023.

Executive recruiting and permanent placement are long-term opportunities, but demand has been low. Due to a market downturn, MRI Network assets acquired in 2022 were impaired by $6 million. With the impairment charge removed, adjusted net income increased to $2.8 million. Adjusted EBITDA rose to $4.9 million with a 52% margin.

The company completed two small acquisitions in Q3. Management is actively looking for more deals, mainly in commercial staffing.

HireQuest expects better performance in 2025 due to market stabilization and cost control. Staffing market stability and disciplined expense management keep management optimistic.

Risk:

Economic downturns can reduce staffing demand.

Integrating acquisitions, such as MRI, introduces short-term margin compression and operational challenges.

Opportunities:

Through franchising, HQI can enter diversified staffing verticals and grow.

They can boost margins by buying and converting to their proven asset-light business model.

The expanded national network enhances HQI’s ability to secure large contracts.

Franchises make HQI resilient to economic downturns. Companies may prefer temporary staffing solutions to full-time hires.

Conclusion:

HQI investment is a long-term buy. HireQuest stands out in the staffing industry because it has a proven asset-light franchise model, an aggressive acquisition strategy, management talent, and material ownership in the common stock. The company has grown in key financial metrics and adapted to economic changes. Despite recent price underperformance, the company’s impressive prior four-year profitable operations, solid balance sheet, cost controls, and disciplined approach to acquisitions present a compelling mean reversion and growth opportunity.

Long HQI

Source: http://shadowstock.blogspot.com/2024/11/asset-light-franchising-profitable.html

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