Profit From The Permanent Rise of Temporary Labor

In the bygone workplace of mid-20th century America, a corporate manager in need of a temporary secretary would issue the edict: “Get me a Kelly girl.”

Today’s Internet-driven economy is producing a much wider array of temporary staffing jobs, regardless of gender.

As the staffing industry booms around the world, one company stands out as the best long-term investment play: Kelly Services (NSDQ: KELYA), a pioneer in the field whose name is synonymous with “temps.” Not only does Kelly face more promising growth prospects than its peers, but its stock is undervalued as well.

With a market cap of $797.4 million, Kelly provides temporary staffing for a variety of industries. Kelly has more than 7,100 full-time employees, with about 500,000 workers at any given time under its placement around the world.

Founded by William Russell Kelly in 1946, the company got its start by placing temporary clerical and secretarial workers who were invariably female. Hence the term “Kelly girl,” which gained wide currency and entered modern folklore.

In 1966, the company changed its name from Kelly Girl Service to Kelly Services, to reflect the growing range of professions under its banner and an office culture that was evolving away from the sensibilities of TV’s “Mad Men.” (RIP, Don Draper.)

Based in Troy, Michigan, Kelly provides employees for clerical and administrative roles; information technology support; telemarketing units; instructional employees for schools; quality control inspectors; technicians for electronic assembly; maintenance workers…the list is a long one, encompassing almost every conceivable sector. The company also offers worker training.

Take this full-time job and shove it…

Temporary workers are in growing demand as companies seek labor flexibility and hedge their bets during an economic recovery that’s uneven and vulnerable.

The trauma of the coronavirus pandemic has restructured the labor force. Unemployment is declining from its elevated heights during the worst of the pandemic, but workforce participation has weakened and many workers are embracing the “gig” economy.

During COVID lockdowns and quarantines, many people decided they either hated their jobs, hated their commute, or both. Many full-time jobs are going begging. These conditions are manna for Kelly.

Temp agencies such as Kelly are all the more appealing to employers that need to beef-up during the recovery but are reluctant to make firmer hiring commitments because of the outbreak of COVID Delta.

According to data from the consultancy Staffing Industry Analysts and other industry sources, the annual revenue of the global temporary staffing industry is roughly $500 billion. The U.S. is the largest market, accounting for about 27% of total worldwide revenue.

The following chart depicts the long-term growth trajectory of the temp market, broken down by job category:

According to the U.S. Bureau of Labor Statistics (BLS), the U.S. economy added 943,000 nonfarm jobs in July, surpassing analyst predictions of 870,000 jobs, signaling continued recovery in the U.S. economy.

The jobs report also was positive for the U.S. temporary staffing industry, with 9,700 jobs added in July and the prior two months upwardly revised by 16,000 jobs. Rising rates of COVID vaccination, school openings in the fall, and the termination of enhanced unemployment benefits in September will continue to generate tailwinds for the economy and the staffing industry.

During the course of a year, staffing companies in the U.S. hire more than 15 million temporary and contract employees, who are then placed into jobs at other employers. That’s an increase of about 50% since the end of the Great Recession in 2009.

The decline of conventional full-time work has affected every demographic. According to Statista, the share of female temporary workers worldwide is about 42%.

At the same time, the gig economy is exploding. In 2020, 52 million people performed contingent work in the U.S., generating $1.3 trillion of revenue.

The economic logic for using these “free agents” is inescapable, if not ruthless. It’s costly to hire and fire high-quality workers. Rather than resort to layoffs of entrenched full-timers when the economy stumbles, it’s more efficient to prepare ahead of time by relying on temps.

But the worldwide labor market also is undergoing a structural change, whereby those temps are becoming more permanent.

Typically during recessions, there’s a jump in the number of part-time jobs and these jobs fall off as the economy recovers. This time around, though, temporary employment is remaining persistently high despite improving economic conditions.

Ordinarily during a recovery, employers who need additional workers are confident enough to take on new full-timers. However, employer resolve these days is bedeviled by a host of worries, including COVID Delta, rising inflation, imminent Federal Reserve tapering, and bloody political battles in Washington. These anxieties help explain why the unprecedented boom in temp hiring is more resilient than in previous cycles.

Businesses are increasingly regarding labor as just another variable cost that can be quickly cut when products and services are in low demand.

Even value-added, highly skilled jobs are increasingly outsourced to developing nations where educated professionals are willing to work for less than their counterparts in developed nations. Admittedly, these factors are contributing to worker insecurity, but the shift to temps is inexorable.

Kelly competes against a field of mostly bigger competitors, but the company stands out for its smaller size, bargain valuation, and lower operating costs, all of which give it greater room for growth.

The Zoom culture…

Another competitive advantage for Kelly is the company’s specialty in the creative services sector, which is increasingly the domain of younger and more mobile people with freshly minted college degrees.

In today’s fiber-optically connected “virtual” workplace, highly skilled employees insist on greater freedom of movement. Kelly has carved out a niche among this creative class, many of whom actually prefer temporary work that entails fewer entanglements.

To be sure, information technology is the granddaddy of outsourced staffing functions and it continues to provide Kelly with huge opportunities for growth, because of the ready ability to reap savings and streamline operations that are digital in nature.

Health care is another growth driver for Kelly. Government cost restrictions create an imperative for health providers to keep payroll and other overhead as low as possible.

Kelly is expanding its already extensive presence in emerging markets, which have shaken off their recent decline and should provide the company with long-term tailwinds. The company is especially focusing on China and Brazil, as growing ranks of well-educated professionals in those countries seek flexible employment with large multinationals that are based in developed countries.

Watch This VIDEO: For Q2 Earnings, The Beat Goes On

On August 12, Kelly Services posted second-quarter 2021 earnings per share (EPS) of $0.49, beating the consensus estimate of $0.33. This compares to EPS of $0.51 in the same quarter a year ago.

The Q2 report represents an earnings surprise of 48.48%. A quarter ago, it was expected that Kelly would post EPS of $0.11 when it actually produced EPS of $0.12, delivering a surprise of 9.09%. Over the last four quarters, the company has surpassed consensus EPS estimates four times.

Nonetheless, sometimes on Wall Street, good isn’t good enough and Kelly’s stock has received unwarranted punishment lately. That’s a buying opportunity for you. KELYA’s 12-month forward price-to-earnings ratio (FPE) stands at 17.8, compared to 22.2 for the S&P 500.

KELYA’s valuation is a bargain, in light of the company’s growth prospects. The analyst consensus is for Kelly to post year-over-year earnings growth next year of 40.1%. The consensus 12-month target for the stock price is $29.50; as of this writing on August 26, the stock hovered at $20.15, which implies it will gain nearly 47% over the coming year.

But I think that’s a conservative estimate. Kelly Services is in a prime spot to thrive, as temporary employment becomes a permanent way of life for millions of job-hungry applicants around the globe.

John Persinos is the editorial director of Investing Daily. Send your questions or comments to mailbag@investingdaily.com. To subscribe to John’s video channel, follow this link.