|Shares Out. (in M):||7||P/E||14.2||12.4|
|Market Cap (in $M):||478||P/FCF||0||0|
|Net Debt (in $M):||-33||EBIT||0||0|
|TEV (in $M):||445||TEV/EBIT||0||0|
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Barrett Business Services, Inc. (BBSI or the company) is a Vancouver, WA based business services provider. This $480mm market cap business offers an attractive way to invest in strong SMB employment growth, wage inflation, and rising interest rates. I believe 60%+ returns are achievable over the next two years using conservative assumptions.
The company’s two primary offerings are Professional Employer Services (PEO) and Staffing. The company currently has over 5,000 PEO clients with more than 170,000 underlying employees. When signing up a new customer, BBSI establishes a co-employment relationship with each client company where BBSI becomes the employer-of-record. BBSI will then assume responsibility for payroll and taxes, workers’ comp, healthcare insurance, retirement plans, compliance and other admin functions while the client retains control over their workforce and staffing decisions. In addition to BBSI providing “outsourced” HR services, the bulk purchasing power of a 170,000+ workforce allows BBSI to extract significant cost savings for its SMB customers when bidding for insurance or other services. The staffing business, which makes up a smaller portion of the firm’s profits, provides on-demand short-term staffing, permanent placement, and long term or indefinite-term placement. For additional background on BBSI and its operational history, please see the previous VIC write-ups on the company.
Why the opportunity exists
In a bull market where the broader indices continue to “melt-up” every day, BBSI’s stock is up only 6% over the last 12 months. I believe this is due to several historical issues that the Street is having trouble moving past.
Why is this a good business to own?
Variant Views/Upside Drivers
As long as management continues to open new branch locations, profit margins will be depressed compared to a more mature branch network. Based on management’s disclosure around margins between mature and developing branches, I estimate the Top 30 branches generate the vast majority of the company’s profits.
BBSI should be able to sustain its historical growth rates in the mid to high teens barring a recession. In the model, I conservatively estimate that gross revenues grow in the low-teens from 2017 to 2020 driven by several factors:
In 2015, management began providing rolling 12-month gross revenue guidance. Management is currently projecting 14% NTM growth through the end of Q3-2018. In addition to strong top-line growth, margins could improve slightly driven by the following factors:
To be conservative, I am currently assuming no operating leverage is achieved in my forecast.
There could be additional upside to my forecast if share repurchases were to resume. BBSI has a history of accretive buybacks and even bought back 30% of its shares outstanding in 2012 from the estate of its late founder. Even excluding this extraordinary buyback, the share count has declined by over 7% during the last 10 years. Buying shares at the currently discounted value would be a compelling use of excess cash.
Valuation & Returns
Disclaimer: The information contained herein reflects the views of the author as of the date of publication. These views are subject to change without notice at any time subsequent to the date of issue. The author has an economic interest in the price movement of the securities discussed in this presentation, but the author’s economic interest is subject to change without notice. All information provided in this presentation is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. In addition, there can be no guarantee that any projection, forecast or opinion in this presentation will be realized. All trade names, trademarks, service marks, and logos herein are the property of their respective owners who retain all proprietary rights over their use. This presentation is confidential and may not be reproduced without prior written permission from the author.
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