We are long TrueBlue (TBI) and see upside of 50% within the next 12 month to our target of $34.  At today’s price of $22.60 you are buying a quality business with both cyclical and secular drivers going forward for 11x 2016 cash earnings.

Thesis summary:

·      The labor market is in the middle of a secular shift to temporary staffing, particularly in low skill jobs, as permanent hires become increasingly expensive and burdensome (mostly due to the ACA)

·      TBI over indexes in construction which we believe is in the early innings of a cyclical recovery

·      The stock is down roughly 30% from its recent highs due to weaker than expected 2014 organic growth, the majority of the issues are temporary and growth is poised to reaccelerate from here

·      In 2014 TBI acquired Seaton which is a higher value add business that has been growing 15-20% for the past few years and will continue to grow double digits going forward

·      Relatively clean balance sheet even after the Seaton acquisition carrying $200m of gross debt (just less than 2x leverage), they will generate $85m in FCF during 2015

·      They have minimal exposure to Texas (about 5%)

·      They remained profitable during the recession

The Business

Founded in 1989 TrueBlue is the largest blue collar temporary staffing firm in the US.  They now have two main businesses:

Legacy TBI

·      692 branches across 50 states, strongest presence in Florida and California

·      $1.8B in revs, 6% EBITDA margins (8.5% last cycle)

·      End market exposure:

o   25% manufacturing

o   20% construction

o   10% transportation (mostly truck drivers)

o   10% logistics

·      The value add of this business is essentially making unreliable labor reliable and taking care of all the back office functionality at the same time (payroll, workers comp insurance, etc)

Seaton

·      Acquired in 2014, TBI had been following the business since 2005 and actually took a run at it in 2012 but couldn’t agree on a price, point being, it’s a business they understood well

·      They paid 8x forward EBITDA, it did $700M in revs in 2014 and carried 5.6% EBITDA margins

·      Versus the thousands of customers the legacy business carries Seaton has 150 larger customers that are highly sticky (97% retention), when TBI signs a customer they are essentially betting on each other due to the depth of integration

·      Seaton has two primary businesses

o   Managed Service Provider (MSP)

§  Think of this as a similar business to legacy TBI in terms of functionality except it relocates the TBI branch to the customer’s facility

§  AMZN is the largest customer

§  The specialty here is flexing a labor force up and down in a big way seasonally in mostly rural or suburban locations

§  Mgmt has noted the pipeline of business is now 2x what it was when they were going through the acquisition process

§  It has been a HSD grower carrying MSD EBITDA margins

o   Recruitment Process Outsourcing (RPO)

§  RPO is essentially replacing a company’s HR functionality

§  This is really the crown jewel of Seaton

§  The value add here is cost savings, they charge on a per placement basis ($300 on the low end, $2000+ on the high end) and can save 30-40% on a cost basis and tend to accomplish the job in 50% of the time

§  DAL is the largest customer and apparently another large airline is on deck

§  Still early days for the industry, Fortune 500 penetration is around 20%

§  It has been a 20% grower and carries 20% EBITDA margins

So why has the stock had such a tough time over the past 6 months?

It should be noted that due to the Seaton acquisition we view the TBI of March 2015 at $22.60 to be of higher quality than the TBI of July 2014 at $31.00.  The weaknesses comes down to organic growth which decelerated from 16%/5%/5% in 2011/2012/2013 to 2% in 2014 (and -1% in Q4).  There were a few main issues that caused this, they should be mostly solved in 2015 and reacceleration in growth will be the main catalyst for the stock to work higher.  Here’s what happened:

·      Their green energy business went from a $30m/qtr run rate down to $17-18M starting in Q1 2014, speaking with mgmt it seems like the lumpier stuff is now gone and the majority of the remaining business is more maintenance in nature.  This cost 2% to growth in 2014 and should be lapped in Q1 2015.

·      They closed about 65 branches in 2014, the idea here is there is a 90% revenue retention when you close a location in an area where branch density is higher.  The problem is that it forces branch managers to focus on integration and not growth.  The legacy business has very short sales cycles so if you take your eye off the ball even for a few weeks it becomes difficult to win incremental business.  Mgmt is going to pump the brakes on this process going forward.

·      The construction segment of their business dramatically underperformed in 2014, in Q4 it was actually down 5% in the context of an improving end market.  This is due to two factors. 

o   The first is the branch closure issue mentioned above. 

o   The second is that their customers tend to be the small regional and mom & pop builders in a recovery that has been dominated by large national players like LEN/DHI/etc.  As we progress through the cycle the smaller players should regain share as capital becomes available, in fact, if you listen to the commentary from distributors such as STCK/IBP they are seeing the smaller builders grow faster than the national guys

Construction is an important business for TBI because it carries gross margins that are roughly 4% above the house, they need this business to get closer to the 30-35% of the mix it was last cycle (20% today) to get EBITDA margins up to that 7-8% level.  Approximately 2/3 of the segment goes into non-res, 1/3 is res. 

Mgmt has stated they believe organic growth can reaccelerate to 7-8% by the Q2/Q3 timeframe from internal initiatives alone and any macro improvement will be gravy. 

What the stock is worth

·      Assuming organic growth accelerates to 5% in 2015 and continues at approximately at that pace in 2016/2017 (remember Seaton should grow double digits in each year so this only assumes 2-3% grow for they legacy biz) cash EPS which backs out $17m of amortization of intangibles will be $1.85/$2.00/$2.25 in 2015/2016/2017

·      FCF will be $2.00/share in 2015

·      There is no pure play peer for either legacy TBI or Seaton

o    MAN is the industry behemoth and does some blue collar work but only 25% of their business is in North America, currently it trades at 12x 2016 EPS

o   RHI focuses on white collar work which saw an earlier cycle upswing (they are back at peak margins), they do basically nothing in blue collar, currently it trades at 19x 2016 EPS

o   I would argue Seaton is a hybrid between a staffer with their MSP business and a PEO with their RPO business(NSP/TNET trade at 25x)

·      Rolling all this together I think a 15x multiple is reasonable giving a fair value of $30 today and $34 in 12 months