Robert Half International Inc. Gives Solid Earnings. Why the Sell-Off?

The market didn't take kindly to staffing specialist Robert Half International's first-quarter results released on Thursday. In a familiar refrain this earnings season, the company saw its revenue generation hit by the strength of the U.S. dollar. However, that wasn't enough to derail earnings from coming in at the top end of guidance. Moreover, the second-quarter guidance looks OK relative to analyst estimates. So what was the market concerned about when it sold the stock off? Let's take a deeper look at the results to find the answer.

RHI data by YCharts

Results vs. guidanceFirst, a look at the results:

  • First-quarter revenue of $1.21 billion compared against guidance of $1.195 billion to $1.245 billion.
  • First-quarter non-GAAP EPS of $0.58 compared against guidance of $0.53 to $0.58.

And the guidance:

  • Second-quarter revenue guidance of $1.245 billion to $1.295 billion compared against analyst estimates of $1.28 billion.
  • Second-quarter non-GAAP EPS of $0.63 to $0.68 compared against analyst estimates of $0.66.

Earnings came in at the top end of guidance, while the outlook for the second quarter is pretty much in line with analyst estimates. In addition, if you adjust for currency, the earnings were ahead of expectations. On the earnings call, CFO Keith Waddell answered a question from Deutsche Bank analyst Paul Ginocchio concerning the effect of currency on revenue. Here is part of Waddell's reply:

Revenue came in lower than expected because of adverse currency movements (that is, a strengthening U.S. dollar), but earnings were at the top end of guidance. If you add that $0.01 in earnings back in, then EPS would have been $0.59, ahead of guidance.

Waddell allayed another worry on the earnings call -- specifically, the fear that falling energy prices would hurt recruitment in that industry and, in turn, Robert Half. Waddell explained that the company doesn't have a "significant exposure" to energy.

So what was it that bothered investors and caused the sell-off?

Two reasons the market got scaredInvestors may have been concerned by the linearity of monthly trends outlined on the earnings call. I've summarized it in the following table, with the wordings taken right from the call. You'll see that the overall market strengthened in January and then weakened in February.

Source: Robert Half International presentations.

Second, a look at quarterly trends reveals that the growth rate slowed for three of four activities in the first quarter. It's somewhat surprising that the U.S. Permanent growth rate has slowed even while U.S. Temporary & Consulting growth increased in the first quarter. In a usual recovery, temporary hiring takes place first (as companies are reluctant to invest in permanent hires) and leads to a pickup in permanent hiring.

Source: Robert Half International presentations.

U.S. Temporary & Consulting remains in growth mode. Temporary consulting is the company's largest profit generator, contributing 72.4% of operating income in the first quarter.

The takeawayIt was a good set of results from Robert Half, but clearly the market wanted more. It's never a good idea to get too obsessed with a few days of sentiment-led trading, but my suspicion is that the concerns expressed in the trading action are probably a combination of profit-taking and macroeconomic worries. Currency also hurt Robert Half's revenue, but it didn't have a significant effect on the bottom line. Provided you think that the economy will improve in the coming quarters, then the post-results sell-off isn't justified.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Robert Half International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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