Investors should beware cyclical stocks looking cheap ahead of a downturn, but analyst Edmond Jackson thinks this pair are worth discussing.
History shows that stocks tend to perform well in January, and during the first two weeks of 2023 they are off to the races.
In the US, the sense is that if inflation has peaked, then it is bullish because the Federal Reserve’s next key move will be cutting interest rates, especially if the economy weakens.
That has spilled over here and being optimistic is suddenly cool, never mind if rising wage awards and telecom bills bake in inflation. A bull market in UK housebuilders and other cyclicals is under way as charts break out of key moving averages.
To me, it is little more than shifting sentiment. Yes, beware glass half-empty thinking that thwarts ability to trade, but be aware that history also shows dramatic rallies during bear markets.
Pre-close updates ahead of 2022 results should disclose any challenges starting to spread, but given tighter monetary policy is a slow squeeze, it probably will take springtime reporting at least to better appreciate the outlook.
Recruiters are already an interesting straw in the wind
These recruiters serve white-collar industries such as finance, technology, engineering and legal. Walters has more of a “specialist/professional” approach than Page, which covers a pyramid of personnel from executive search down to clerical professional and generalist staffing.
Despite being a global business, Page might therefore be considered more sensitive to a downturn – say if firms engage general cost-cutting – yet its equity is slightly better-rated than Walters. Being a £1.5 billion mid-cap helps versus Walters’ tighter liquidity as a £375 million business.
Economists reassure that the labour market is tight, hence a low risk of people losing jobs and a shallow recession if any.
Indeed, Page says that despite a reduction both in candidate and client confidence, “we continue to see candidate shortages and good levels of vacancies”.
Quite whether that suffices for a “buy” stance is unclear, but I think it is more relevant to figuring out 2023 than strong Christmas sales by retailers that reflect food price inflation.
Valuations halve - does that imply value?
An adage says that among the worst investments are cyclical stocks looking cheap ahead of a downturn, although if you got lucky on timing, housebuilders are now in paper profit.
There has certainly been a pattern of mean-reversion. I favoured Walters at 555p in January 2019, after it had de-rated from 800p and traded on a forward price/earnings (PE) ratio of just over 10 times. Similarly, Page, I tagged as a “buy” on 11 times earnings at 442p, two months later.
They soared to 20 times earnings by June 2021, when I suggested both were fully valued and “buy” applied only if you were in the “transitory” inflation camp. US Federal Reserve minutes suggested it was close to withdrawing stimulus, in which case sell into strength.
Page peaked at 636p that autumn and Walters at 862p in January 2022 then de-rated to lows at the end of last September that possibly represented forward PEs in high single digits.
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If yields are dependable then they ought still to be supportive. Consensus anticipates a 23p to 24p total dividend for Walters in respect of 2022 and 2023, hence a near 5% yield covered over twice at 505p a share, which ought to be supportive.
Page is rated a bit pricier – at 455p, on a 13x forward PE, yielding 4.3% with earnings cover near 1.8 times.
But while ratings have mean-reverted to levels that have historically offered value, macro circumstances are different.
From late 2008 to autumn 2021, the global economy enjoyed loose monetary policy and serial stimuli. That has now shifted to tightening and we shall see if central banks achieve their inflation targets without causing recession.
Walters frames its update as ‘difficult market conditions’
Walters’ reference to “difficult market conditions” is despite a respectable 8% like-for-like advance in net fee income – the benchmark performance measure of a recruiter – in the fourth quarter of 2022, at constant currency.
Robert Walters - financial summary
Year-end 31 Dec
|Turnover (£ million)||813||999||1,166||1,233||1,216||938||971|
|Operating margin (%)||2.8||2.6||3.6||4.0||4.2||1.6||5.6|
|Operating profit (£m)||23.1||26.2||41.9||49.7||51.2||14.8||54.1|
|Net profit (£m)||15.3||19.9||29.3||35.6||34.0||5.7||33.5|
|Reported earnings/share (p)||18.7||25.4||38.9||45.8||44.9||7.5||43.7|
|Normalised earnings/share (p)||19.3||26.0||39.5||46.2||45.0||8.9||43.0|
|Return on capital (%)||24.7||25.2||33.9||32.2||23.3||6.8||23.7|
|Operating cashflow/share (p)||19.3||37.6||42.4||80.8||92.3||131||43.9|
|Free cashflow/share (p)||12.0||31.2||33.1||72.7||79.7||118||26.7|
|Dividend per share (p)||7.1||8.5||12.0||14.7||4.5||15.5||20.4|
|Covered by earnings (x)||2.6||3.0||3.2||3.1||10.0||0.5||2.1|
|Net assets per share (p)||119||133||162||202||211||222||228|
Source: historic company REFS and company accounts
Robert Walters, the eponymous CEO, cautions of “a softening of recruitment activity across many markets” and growth being “more muted, across all regions and all forms of recruitment...”
Looking back to the third quarter, 18% growth was achieved after 16% in respect of the first-half-year and 21% for 2021 as a whole.
This latest update also cites Walters’ own headcount peaking in November and declining in December.
Such signs of slowdown make me cautious of an apparently modest rating, lest the global economy tilts into recession.
Yet there is a more positive scenario if China’s removing of Covid restrictions proves an overall success and helps the region.
Walters derives 44% of net fee income from Asia-Pacific but this contribution grew only 3% in the fourth quarter as China fell 24% amid Covid disruption. Japan and Australia, the region’s largest businesses, eased 2% and 3% respectively, although South Korea soared 30% and Malaysia by 29% with New Zealand up 18%.
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Asia-Pacific seems quite a tricky call, being quite dependent on serving the US economy, so recession there could offset gains from China re-opening.
Despite general criticism that continental Europe is less dynamic, this region scored well – achieving 18% growth.
The UK saw 8% growth – in line with Walters’ overall fourth-quarter progress – where financial services, commerce finance and technology recruitment “held up well through the quarter despite the negative economic backdrop” and there was a “notable uptick” in contract recruitment.
Shareholders can take some encouragement about how “all forms of recruitment – permanent, contract, interim and recruitment process outsourcing – have continued to grow despite the more uncertain market conditions”.
I would not therefore argue with a “hold” stance except to say that when I last met Robert Walters – some years ago, not as far back as its 1996 flotation though – he implored how short visibility in recruitment is.
It also appears to suggest the wider economy is so far resilient, but vigilance will be required.
Page has a quite similar narrative for Q4
Page fared much worse in Asia-Pacific though, where net fee income was down 16% with China 41% lower. This was mitigated by mid-single-digit growth in the US and continental Europe, although the UK slipped 2% and the group outcome was 3.5% growth.
Perhaps it shows Walters’ specialist/professional approach as relatively more defensive.
“Client and candidate confidence deteriorated towards the end of the quarter” and net fee income per Page executive, declined 12% like-for-like.
The CEO takes encouragement that despite high economic and political uncertainty, candidate shortages and “good levels of vacancies” persist.
If this is maintained, then it plays to a “soft landing” scenario where employment levels remain firm hence support consumer spending.
PageGroup - financial summary
Year end 31 Dec
|Turnover (£ million)||1,065||1,196||1,372||1,550||1,654||1,305||1,644|
|Operating margin (%)||8.5||8.4||8.6||9.2||8.9||1.3||10.3|
|Net profit (£m)||66.2||72.1||83.1||104||103||-5.7||118|
|Reported earnings/share (p)||21.1||23.1||26.4||32.4||32.2||-1.8||37.0|
|Normalised earnings/share (p)||21.3||23.1||26.4||32.4||32.2||-1.7||37.0|
|Return on capital (%)||39.5||39.3||40.8||42.1||33.5||4.3||34.8|
|Operating cash flow/share (p)||26.3||28.4||27.4||28.3||48.9||42.9||45.4|
|Free cash flow/share (p)||21.5||20.3||20.8||20.3||40.7||35.8||36.8|
|Ordinary dividend per share (p)||11.5||12.0||12.5||13.1||13.7||0.0||15.0|
|Special dividend per share (p)||16.0||6.4||12.7||12.7||12.7||0.0||26.7|
|Covered by earnings (x)||0.8||1.3||1.0||1.3||1.2||0.0||0.9|
|Net assets per share (p)||68.0||75.6||82.6||97.0||98.7||96.1||103|
Source: historic company REFS and company accounts
Yet it is a bit concerning how permanent recruitment has been quite flat while temporary rose 18% - as if firms may be less committal about hiring. Page derives only a quarter of net fee income from temporary though.
Like Walters, its narrative is “good in parts” and a reliable outlook remains elusive.
I therefore also regard Page as a “hold”, if needing close ongoing attention. It’s as yet unclear whether its dividend yield offers a satisfactory return for the mercurial risks, or if the stock will fall to a level that where it does.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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