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Thursday, May 22, 1997
Employee
Solutions HOW DID IT FIND TROUBLE? Who can you hire to fix this mess? After a year of analyst upgrades and beating earnings estimates, Employee Solutions has fallen on hard times. A pair of dismal quarters and a scorching article in a financial magazine have downsized shares to $4 3/4 after trading as high as $28 5/8 just three months ago. When the company delayed its fourth quarter earnings report in mid-March, pre-announcing a shortfall, investors began to look for their walking papers. At the same time, Financial World released to Bloomberg the details of an upcoming article entitled "Employee Delusions: The Murky World of Employee Solutions," where the writer blasted the company for everything from inadequate reserves to the business practices of the CEO and the stock underwriter. Shareholders clocked out and went home. Over just three trading days in March, the stock tumbled from $22 5/16 to $6 1/4. When the company finally released its fourth quarter earnings a week later, investors were relieved that it only missed the $0.14 a share earnings estimate by seven cents. While the $0.07 a share showing was bleak, the company had at least addressed one of Financial World's concerns by bringing in an actuary firm to review the workers compensation reserve level and then adjusted it accordingly. BUSINESS DESCRIPTION Unlike your plain vanilla temp agencies that simply provide labor-starved customers with temporary hires, Employee Solutions offers a buffet of human resource services. The Phoenix-based company actually "leases" employees. While the client company retains managerial control over the worker, Employee Solutions remains the employer of record. The client dictates the salary and hiring and firing decisions, and Employee Solutions handles the rest. From payroll to workers compensation to health and pension plan benefits, Employee Solutions was sweet salvation to the small business owner looking to avoid the logistical headaches of new hires. The company presently has more than 40,000 employees working for more than 1,400 client companies. FINANCIAL FACTS Income Statement
12-month sales: $561 million
12-month income: $10.3 million
12-month EPS: $0.32
Profit Margin: 1.8%
Market Cap: $156.8 million
Balance Sheet
Cash: $12.6 million
Current Assets: $79.9 million
Current Liabilities: $48 million
Long-term Debt: $45.3 million
Ratios
Price-to-earnings: 14.8
Price-to-sales: 0.28
HOW COULD YOU HAVE SEEN IT COMING? While the company claimed that its low-risk approach merited the meager reserve level, anyone who browsed the annual reports of Employee Solutions peers could have seen that the company was holding its reserves at a fraction of the industry benchmark. The Financial World article certainly saw it coming long before the actuary firm hired by the company came to the same conclusion. Also, while the 4th quarter earnings report may have been a welcome relief to some, a smart investor might have sold into that rally. You see, profit margins had been cut in half -- they too had been downsized for the quarter. WHERE TO FROM HERE? As analysts lowered their first quarter earnings estimates from $0.16 to $0.11 a share, it seemed that all of the pessimism had been priced into the stock. With the reserve woes licked, it seemed that the company was ready to ditch the rear-view mirror and get back to work. However, first quarter 1997 earnings came in at just $0.02 a share. Unlike the previous quarter, investors took no solace in knowing that company missed estimates by just nine cents. Brother, can you spare a dime? To the company's credit, revenues are soaring, and there are far worse things than reporting modest profitability. Analysts now estimate earnings of $0.54 a share for the year, and should the company make this number it might be worth a closer look. However, it's obvious that Employee Solutions has more than just a temporary job to do in getting back on track. -Rick Aristotle Munarriz ([email protected])
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