|Shares Out. (in M):||7||P/E||13.0x||10.6x|
|Market Cap (in $M):||299||P/FCF||13.0x||10.6x|
|Net Debt (in $M):||-15||EBIT||34||46|
On the heels of an anonymous short sellers’ drive-by shooting, Barrett Business Services Inc. (BBSI) shares are at a 52-week low and off over 60% from the January 2014 high print. A recently released research opinion full of misleading conclusions has given long-term investors an opportunity, at a bargain price, to buy a very high quality business in an industry sure to be increasingly in demand. I have been a BBSI shareholder since 2008. At current prices, this is the best entry point I have seen in many years.
BBSI is magic-formula, cash generating business in a service industry, with very low capital requirements (FCF=earnings), recurring revenue from 95% client retention, no meaningful competition, and 30% annual organic revenue growth over the last four years. Revenue has grown 14x since 2001.
With a low industry penetration and the recent completion of a two-year process to more than double their client serving capacity, BBSI is very likely to at least double earnings in 3-4 years. Now, priced at 8.3x TEV/2014 EBIT and 13x PE (thanks Copperfield), BBSI owners should benefit from multiple expansion and enjoy share price upside of more than 100% over the same period.
Wait, did I mention BBSI has no net debt, tremendous operating leverage, and a track record of smart capital allocation?
Here is a link to the full presentation with better formatting and charts:
|Entry||05/14/2015 12:02 AM|
and then what happened?
|Subject||Re: Re: Update|
|Entry||05/14/2015 10:34 AM|
Down 30% two hours after my updated post based on an announced formal SEC investigation into accounting practices regarding workers comp reserving practices. Doh!
OK, I accept the nomination for the Worst VIC Post Timing of the year.
Did the market overreact? I think yes, and I have added at these prices.
Whatever the outcome the investigation (or the class action lawsuit which is covered by D&O policy), it will not threaten the long term viability of the business. BBSI, with ample reserves, has never been better operationally.
Securities laws do not allow for “fraud-by-hindsight” and there is well established case law in the context of insurance reserves that recognize the forward looking nature of actuarial judgements. There is a wide latitude within actuarial science as to what is considered adequate. BBSI’s external actuaries will not only support BBSI but will support each other. The new actuary (Willis) has re-run the prior actuaries reserve calculations prior to the reserve charge and found their calculated reserve levels to be “reasonable”.
Additionally, the California self-insurance regulator audited BBSI every other year for two decades and never once suggested that BBSI reserves were inadequate.
I expect a more through defense of BBSI’s position to be submitted in the form of a Motion to Dismiss with the next 30 days or so.
There is a high bar for proving fraud and accounting irregularities even when it has occurred. In this case I don’t see any evidence of either, and over time I expect these legal and regulatory issues to fade away. As this happens, the only thing remaining to focus on will be the quality of BBSI’s business.
|Subject||Re: Re: Re: Update|
|Entry||05/14/2015 06:54 PM|
happens to the best of us. Have you spoken to any customers that stuck with them thru the disruption last year? Why did they stay? Just better service? cost of switching? hopefully it wasnt just pricing; which is sort of what i'm asking.
|Subject||Over $5.00/share in 2017 and over reserved.|
|Entry||08/16/2016 09:22 AM|
Complications surrounding the 2014 reserve charge and missteps by the ex-CFO have masked the earnings power and a 50% market discount on this high quality business.
It’s been a tough two years for BBSI.
Why would anyone touch this company? Two reasons:
Earnings power and valuation.
So what is holding the shares back?
What buyers are missing.
Since the reserve charge, the most important ongoing question is WC reserve adequacy.
The other remaining legal and financial reporting issues are largely behind them:
Auditor 10A letter.
Ex- CFO’s unsupported journal entries self-disclosed in March 2016.
What remains is a shareholder class action lawsuit, and a SEC/Justice Department investigation likely centered on the prior CFO’s non-GAAP journal entries.
Going forward from here.
Reserves are conservative. The significant reporting issues are behind them. The few remaining legal issues don’t threaten BBSI’s business. When the market recognizes the true earnings power and assigns a reasonable growth multiple, shares will appreciate rapidly.
|Subject||One more thing|
|Entry||08/26/2016 10:26 AM|
I forgot to mention that on June 30, 2016 BBSI held $300mm in money market, short term CD's, and T-Bills. This amount will grown to $330mm by year end. This paper will reset quickly with higher short-term rates. 100bp is worth $3.3mm/7.2mm = $0.46/share pre-tax.
|Entry||11/12/2016 11:22 AM|
· 17% revenue growth.
· Q3 2016 is the 26th consecutive quarter of 17%+ revenue growth.
· Same customer sales of 9% underscores the health of BBSI’s client base and the effectiveness of BBSI’s co-employer offering.
· 200 new net clients, highest ever for a Q3
· Workers comp frequency trends are down 14% in the last year, and 18% in the last two. BBSI has influence on this performance metric through safety programs & incentives.
· Lower frequency translates into lower WC risk.
· Old WC claims (2012 & prior) continue to trend positive. Since 2012 & prior was used as the basis for estimating liabilities for years 2013 and forward, positive development in 2012 & prior indicates reserve adequacy.
· Class action lawsuit settled.
· Deloitte & Touch appointed as auditor.
· New audit committee board member appointed.
· WFC credit line paid off one quarter early. No material debt remains.
· Company maintains 18% revenue growth guidance for the next 12 months.
· One-time expenses for the recent restatement & remediation for 2016 are now estimated at $8.2mm, up from $6.4mm ($0.76/share from $0.57/share)
· SEC investigation not yet closed. I expect a fine here, likely not material.
· Financial reporting remediation work still to finish.
· Prospects for growth remain high.
· FCF = Earnings.
· Infrastructure in place for 18 months of 15%-20% growth.
· Reserves are adequate or likely conservative.
· Run rate EPS for 2016 is $3.75 - $4.00 / share.
· Expected 2017 EPS around $5/ share.
· With the WFC credit line at zero, the building of surplus and a strong balance sheet has begun.
· At $52 and 15%+ growth, shares still offered at big discount to fair value of $90-$100.