HireQuest
Q3 2021
By Manuel Maurício
November 12, 2021
Hirequest has a small following of 3 on Twitter.
All of them are highly bullish.
One of them is so bullish that he’s completely blind to the less positive stuff.
I like to own such under-followed stocks.
And I like HireQuest.
Just the other day I was telling Gonçalo Garcia and Diogo Gonçalves that this could become my highest conviction idea.
I’m not counting on any multiple re-rating.
I’m not counting on any operating leverage (higher margins).
I’m just counting on a beautiful business model and on what appears to be a very astute management team.
*If you’re new to HireQuest, I strongly recommend you to read my previous takes here.
In the third quarter, the System Wide Sales went up by 79% compared to a year ago. 22% of it was organic growth whereas the rest was due to the recent acquisitions of Snelling and Link.
This translated into a 103% growth in revenue of which 52% was organic and the remaining $1.6 million were related to Snelling and Link.
And a 74% increase in the operating profits, which were hurt by a higher non-cash compensation. I’ll need to understand this expense better once the full quarterly report comes out.
On another note, it’s amazing how, wherever I turn to, everyone’s saying that there’s a labor shortage. Even here in Portugal.
This benefits the margins, but I’m not sure if it benefits the overall growth as the fewer workers there are, the less revenue for HireQuest.
So far, the company has been able to grow organically. The management has said that,”over the course of the quarter, weekly sales results improved from trailing 2019 comps, 10% to 15% in early July to pulling even by the end of September” and “We also achieved a milestone this quarter with system-wide sales matching 2019 levels, levels we have not seen since the pandemic began in early 2020.“
This is great, but what they didn’t say is that Snelling and Link combined had flat revenue from the second quarter. This might be explained by a lower store count, but at this point this is just speculation from my end. I’ll be inquiring the company about it.
HireQuest has recently acquired Recruit Media and Dental Power Staffing, and the management has hinted at wanting to enter the medical industry vertical and how this latest acquisition will help them in doing so.
I still get the sense that we’re looking at one of the best management teams I’ve ever come across.
To mention something that I don’t like in this story, I’ve got to mention the dividend. I would much rather see them using the money for acquisitions.
Talking about acquisitions, the company still has a $60 million credit line. If they acquire other companies at, what, a PE of 10x, that would represent an additional $0,43 in Earnings per Share, or an increase of 43%.
And I’m not even thinking about the possibility of them selling the stores back to the franchisees, thus recovering most of the acquisition costs.
For the full year of 2021, the company should be making around $1 dollar in Earnings-per-Share. At today’s share price of $19.4, the stock is trading at around 20x.
As I’ve mentioned in previous write-ups, this doesn’t look cheap from a deep value investor’s point of view, but we’re talking about a company that is growing revenues at 103% and could keep growing at double digit rates for many years.
HireQuest will remain a long term position in the Portfolio with added confidence.
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