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If you are a bonkers bull...then buy PageGroup

By Chris Bailey | Wednesday 10 January 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

One of the hardest things for less experienced stock market participants to get their heads around is the expectations game. Numbers can be good (or bad) but if the teenage scribbler analyst, ‘professional’ fund managers and ‘the great unwashed’ in the form of other market participants broadly already think something, then confirmation of this event is not going to really change the share price needle. Of course as a consequence companies then start to try to become clever in managing expectations in order to 'beat' anticipated numbers...but that's for another time.

I am rambling about all of this because today recruitment company PageGroup (PAGE) (you may know it better by its old name of Michael Page) observed in its end of year trading update that full year operating profit is expected to be ahead of consensus market expectations of £115 million (good) but within the range of current market forecasts, which stretch as high as £119 million (Oh).

That's kind of interesting. In the short-term the bulls are therefore right and the market, like sheep, shifts towards their views with the shares currently up 6% and pushing above 5 quid a share, close to the last year's high. But given the 'beat' is in the order of 2-3% the reaction has been rather excitable. This might have something to do with the company reporting its best quarter since Q3 2011 with France, Germany and Asia (2nd biggest geographic sector for the group now with 'Greater China' now the third largest individual market for the group) getting special shout-outs. Nine countries had record quarters with 21 having over double-digit growth.

That is all headline very impressive. And there is even the thick end of £100 million of cash on the balance sheet (not bad for a growing company with a market cap of a little over £1.5 billion) and the company has also managed to distribute a special dividend to augment its 2% odd natural yield. All impressive stuff. If you believe in synchronised global growth and the like then PageGroup is knocking it out of the park currently, as any self-respecting recruitment company should be in such an environment.

This is though with one very overt drag. As the company noted on its analyst call: 'all regions except the UK have delivered double digit growth'. That damn UK! Hiring here in the fourth quarter was down 2.8%, although this was not as dramatic as the 7.6% fall in the previous quarter. While the company did not aggressively cite Brexit, you kind of know what is behind its 'ongoing uncertainty' observations that hit the confidence levels 'particularly among some of our multinational clients and more senior permanent candidates'.

So where do we go from here? Well the first observation is that the market is going to be revved up about the group's world ex-UK operations and expectations are going to be firming for profit generation over the next year or two, helped by the super strong balance sheet and c. 5% of market cap total shareholder remuneration (including the special dividend). Additionally the UK business continues to lap easier comparisons and 'slightly higher' for the next year is the easy conclusion. So lob on 5-10% earnings growth, a mid-teens multiple and why not have a go at the all-time share price high of 600p a share from 2007? That's 20% appreciation to me and you.

Well that's nice...but a word of warning. The reason I am not buying PageGroup today is because I doubt the world is that neat. Listening to the conference call it was all about hiring more staff to deal with all this customer demand...which is always the way with these businesses way beyond when it is prudent to do so. This is why you need to be bullish about the world because the trouble with staffing companies - just like advertising ones - is that the assets walk out of the door at the end of the day AND the world is changing with the rise of online. Certainly good companies and a bespoke approach will still persist in both areas but it is not going to be a faultless road and hence paying up relatively big for the shares is an implied global economic optimism punt. If you want this sort of play than snaffle a few shares of WPP (WPP), which I last wrote about in an unexciting fashion back in August and whose shares have continued to pull back. Same sort of trend but less vol and has underperformed notably.

As for PageGroup, feel free to use it to help you find a job but if you must buy the shares (or carry on holding them), do it with your eyes open.

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