From: James Cramer
Sent: Friday, March 02, 2012 6:12 PM
To: Nicole Urken
Set up Cintas for Tuesday —saying that we think CTAS is a great Labor report stock—so get ready—and then we lay it out. Add-on to our other labor plays.
From: Nicole Urken
Sent: Friday, March 02, 2012 6:14 PM
To: James Cramer
Subject: RE: CTAS
K. We had talked about CTAS back in January and noted we would wait for a pull-back, but it hasn’t come. Lots of company-specific levers and good additional “labor play” name adding to the ones we have recommended.
The U.S. Bureau of Labor Statistics report on Friday continued the positive data points we have gotten showing momentum for the U.S. labor market. The establishment survey showed an increase of 227,000 jobs in February—the third month in a row of 200,000+ jobs being added and placing the three-month moving average at 245,000. The household survey was also strong, with the unemployment rate remaining at 8.3 percent even as the labor force expanded by 476,000 (a positive as it means people are re-entering the labor force now that jobs are available). Additionally, we are seeing volatility in the initial claims levels easing with the four-week moving average approaching the 350,000 mark (better than the previous 400,000 mark we were recently seeking). While times remain tough for many individuals and families out there, the key driver to pay attention to is the incremental improvement we are seeing. And it is this incremental improvement that will continue to drive the derivative labor plays. Who are they?
The Payroll Processors: The main names here are Paychex and Automatic Data Processing . These companies are the leading providers of payroll processing, human resources, services, tax and benefits administration solutions in the U.S. As hiring continues to pick up, both of these companies make more money—one of the reasons the stocks have continued to kick up. Also importantly, both names have strong dividends. This is key as both companies “pay you to wait” as the recovery, despite continued signs of strength, remains slow and uneven. Back in December, we highlighted a preference for PAYX. Ultimately, this one has (1) a higher dividend with a 4.1 percent yield, (2) later cycle upside due to its leverage to small businesses, with over 80 percent of its 564 thousand clients have less than 20 employees or less, (3) pure U.S. exposure—while ADP has some European leverage, and (4) continued turnaround story under CEO Marty Mucci that is bearing fruit via modified product offerings, pricing relationships and internet based record keeping. ADP is ultimately a bit less risky due to more diversification and remains a solid play as well, but it has less upside potential than PAYX. Note: While both names are better positioned in higher-interest rate environments (as they make money off the float from funds they hold for their clients while waiting for employees to cash their paychecks), the current record low-interest rates are priced into the stocks—and, when rates do rise eventually, they will also be poised for additional upside.
The best of the bunch is Cintas which we recommended on "Mad Money" on Tuesday. While CTAS has had a huge run since lows in early October, it will continue to surge as hiring data improves. It has been hard to find much opportunity for a pull-back in this one, so starting a smaller position even at these levels could yield additional upside. With over 70 percent of the company’s revenues from uniform rentals, with additional drives from uniform direct sales, safety and fire and document management services, the company is poised to benefit from an improved macro backdrop along with margin expansion from cost discipline initiatives.
The Staffing Companies: In the latest labor report, we heard that temporary staffing increased by 45,200 jobs in February on top of 32,100 in January—strong numbers and reflective of a growing portion of jobs from temp positions. Staffing companies make money largely as follows: They set up temporary jobs with their clients and make money off the difference between the bill and pay rates. (In other words, if a staffing company gets you a job that pays $18/hour, your employer might pay them $22/hour for your time; so the staffing company pays you the $18 wage and pockets the $4 spread). Temporary employment is a leading indicator for permanent employment, but will also remain a key driver itself during the still-lumpy recovery. One key staffing company for positions in lower level administrative and light industrial skill sets in the U.S. is TrueBlue and for names focused on high-level skills sets (such as IT, financing/accounting, legal, engineering, sales & marketing) look at Robert Half International and Kforce.
In the hiring space, Monster Worldwide has seen a surge of late after announcing plans to commence ‘strategic alternatives’ –including a possible sale. But this one has suffered from increased competition from the likes of LinkedIn and beyond and I wouldn’t dabble in the headline-driven trading action of this one. LNKD does remain better positioned than some of the other fresh-faced social media IPOs, but proceed with caution on this one.
The bottom line: It is undeniable that we are seeing an improved labor market—which is lifting the derivative labor plays along with other sectors (look at consumer discretionary continuing its strong surge despite the high gasoline prices!) Take a look back at Paychex, Cintas and Robert Half among others as your ‘labor plays’ even as they have run—there is more fuel in the engine.