Robert Half International – A High ROIC, Prodigious Free Cash Flow Producer Obscured By EPS Cyclicality

Robert Half International – A High ROIC , Prodigious Free Cash Flow Producer Obscured By EPS Cyclicality by Nat Stewart, Opus Capital Managment

We can’t help but think that “Mr. Market” undervalues Robert Half International, Inc. (RHI) when viewed over time vs. the myopic focus on next few quarters. The knock on the company is that staffing is a highly cyclical and economically sensitive business – RHI tends to trade in line with the other staffing firms.

[We are long in our Small Cap Value Plus and All Cap Value Plus strategies.]

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However, the interesting thing is that RHI’s free cash flow is much more stable than its net income – a fact that “Mr. Market” often seems blind to.  In the below chart, green is FCF and blue is Net income.  RHI has always covered its dividend on a FCF basis with a substantial margin of safety, which is not clear when you look at more volatile net income based dividend coverage.

Here is a fairly staggering group of figures for a company trading at a forward P/E and FCF multiple of around 12:  Since 1997, the company has earned $3.2B in cumulative profits, and paid back $3.7B to investors ($875M dividends + $2.7B buybacks).  In other words it has paid out greater than its net income.  It can do this because during this period, FCF was nearly $3.9B.

This cash flow profile is reflective of the company’s low capital intensity and a very high 35% ROE (high in spite of no debt and $1.85 share net cash).

Robert Half International, RHI

In our opinion, “Mr. Market” is so focused on the cyclicality of RHI’s EPS (which at this point looks heavily discounted) that he seems to miss the long-term free cash flow story and the latent value of RHI’s ultra-conservative balance sheet.  We believe that RHI could sustainably improve its stock price by immediately increase its dividend by 50% and considering a Dutch auction tender.

Disclaimer:  Mr. Stewart is a Portfolio Manager for Opus Capital Management’s Small Cap Value Plus strategy. The Small Cap Value Plus strategy provides total return and income for investors by focusing on the attractive universe of small cap dividend payers. Historically, these companies have outperformed the broad small cap universe and provided superior downside protection. Make sure to bookmark our Institutional Insights blog to follow along with our latest thinking. Opus Capital Management reserves the right to make investment decisions regarding any security without further notification except where such notification is required by law.

We are long in our Small Cap Value Plus and All Cap Value Plus strategies.