4/09/2017

Good Company for a Cheap Price, DHI Group (DHX)


This post began by searching for stocks hitting their 52 week low. The DHI Group DHX reached its 52 low on Monday 04/03/17. At $3.90 it offered investors value. Then, the stock (DHX) moved up over the next few days as I prepared this post. DHX closed Friday (04/07/17) at $4.50.

The DHI Group (DHX) is a micro-cap with historical and impressive, consistent high FCF margins that the market forgot. Revenue growth challenges from a difficult specialized job market and increased competition (mostly perceived) chased away the original shareholder base of magic formula growth investors. This overlooked investment has an asset light business model that consistently generates the staffing industry's highest FCF yields. Also,coupled with its aggressive, opportunistic share buybacks, debt reduction and activist interest the stock offers longer term value investors a tempting opportunity.

Profile:
DHI Group (DHX) offers employment related professional connections through several specialized job recruitment websites. Additionally, their software services access, search and analyze their proprietary resume databases. These targeted professionals work within technology, financial services, energy, healthcare and the hospitality industries. Above all, the goal is to allow professionals and organizations to access proprietary data to compete for employment connections. Employers and recruiters use their websites and services to find the most qualified professionals within their skilled occupations. Individual professionals use their websites and services to find the best jobs, industry news, detailed salary information, and expand networking opportunities.

Their online recruitment packages target the difficult to fill employment categories experiencing a scarcity of skilled professionals relative to market demand. These online marketplaces are where employers and recruiters find employees. Professionals use the services to find job postings, news, career development and recruiting services. It's DHI Group (DHX) of recognized web sites, quality and size of its database of industry candidates that creates a competitive advantage. Last, DHI (DHX) has been in the recruiting and career development business for over 26 years.

Based on FASB accounting rules DHI has three reportable segments; Tech and Clearance (Dice, Dice Europe and ClearanceJobs); Global Industry Group (eFinancialCareers, Rigzone, Hcareers and BioSpace); Healthcare (Health eCareers). The remaining other services and activities individually are less than 10% of consolidated revenues, operating income or total assets.

Most of the revenues come from employers and recruiters who pay a monthly or longer-term contractual agreements for recruitment packages. These packages offer a combination of website job postings and access to their database of resumes on Dice, Rigzone, eFinancialCareers, ClearanceJobs, Health eCareers, BioSpace and Hcareers

This post will not be an operational deep dive. Or an analysis of the recruitment industry.Instead I will use DHI’s historical and competitors’ financial results for my investment case to justify its deep relative and historical valuation discount.

Current Valuation per Yahoo Finance as of  04/07/17:
 Market Cap= 272.67M, Enterprise Value =  272.67M, EV/EBITDA = 5.79, 52 week change = -45.30%,YOY revenue change -15.60%, Gross Profit Per Share = 3.92, Price Per Share on 04/07/17 =$4.50

Noteworthy comments on the below historical valuation table.
A consistent high FCF margin, current gross profit per share near its current market price.

An aggressive share count and long term debt reduction compares favorably to a mean reverting attribute , an unjustified enterprise value drop of 44% from 2013.

Historical low valuation for EV/GP at 1.36 versus the average of 2.42 over 2013 to 2016. EV/Revenue also at historical low valuation.






































DHI Group Versus 15 Staffing Industry Peers

Price Performance: Annualized 3-year stock return is -14.78% versus the +2.13% for the comparable 15 staffing peers, YTD% stock return is negative -29.60% versus industry average of positive +2.78%.

The Enterprise value dropped -44.89% from 2013 versus the industry's positive +19.55% over the same 3-year period.

DHI Group's FCF and Gross margins trounce its industry peers. TTM GM% is +85.85% versus industry +36.61%, FCF margins for the TTM is 14.19% versus the industry TTM average of 3.17%, 3 year (2013 to MRQ) average FCF margins is 16.68% versus the 3-year industry average of 4.16%.

Vigorous capital structure improvements with reduction in shares outstanding and debt from 2013 to the MRQ. Long Term Debt per share for 2013 to the MRQ reduced by 16.67% versus the industry increasing long term debt by 46.22%. Over the same 3-year period 2013 to MRQ shares outstanding reduced by 7.74% versus the industry .79%. See below supporting table

Industry Analysis


































Risk:

LinkedIn's increased entry into the recruitment market is an industry concern. This along with other competitors will impact pricing and growth.

A recession or weak economic growth.

An ill-conceived or poorly integrated acquisition pressured by the need for growth.

Subscriber decline will impact the brands value and pricing power.

Recent insider selling.

Opportunities:

An attractive absolute and relative valuation. Mean reverting candidate with a valuation gap and the industry's worst performing stock price. Valuation at 5 year low for P/B,P/S, and stock price returns.

A history of sound capital allocation with management correctly weighing the benefits of acquisitions, technology improvements, debt reduction or share buybacks.

In the fourth quarter of 2016, announced a decision to explore strategic alternatives. A financial advisor retained to aid its exploration of strategic alternatives.



Long: DHX


2 comments:

Anonymous said...

Comparing DHX with Monster, which was acquired at a 25% premium to its trading price in August, EV/Sales for MWW was around 0.83. DHX has an EV/Sales of 1.2. Google trends for Dice.com has been fairly stable over the past 12 months. Monster, not so much.

ShadowStock said...


Thanks for the comment.

DHX commands EBITDA, Gross and FCF margins far greater than a generalist like Monster Worldwide (MWW). That also applies to or other executive recruiters such as KFY, HSSI, RHI, MAN, KFRC.

Recruiters and HR organization are willing to pay a premium for DHX's access to high level professional talent with specific skill sets. Further, DHX offers online software tools to augment the search. This option commands high software like margins.