DAVOS: Adecco Can Profit from Pickup in Growth

Recruitment company Adecco (AHEXY) has been on a hot streak for more than a year – and it may not be over yet.

"I think we are in a good position to show good growth this year," said Chief Financial Officer Dominik de Daniel in an interview at the World Economic Forum in Davos. "I think there is no question that earnings have to grow faster."

The prospects of Adecco, which competes with the likes of  Manpower (MAN) and Randstad Holding (RANJY), are closely tied to growth in gross domestic product, so an improvement in the economic outlook for Europe is good news. In the euro zone, comprising the 17 countries that use the common currency, GDP shrank 0.4% in 2013, according to forecasts. It is expected to grow 1.1% in 2014. That's an important turnaround: the euro zone has seen positive growth in on two of the past five years.

De Daniel's confidence in 2014 stems in part from the rebound in manufacturing in Germany and Spain in the third quarter of last year. He sees good opportunities "especially in the first half of the year, primarily in the industrial business, because the industrial business is the early indicator of a real recovery." A recovery in the professional sector will come in the second half.
Still, de Daniel reckons many of the new jobs will be temporary rather than permanent. The economy needs to grow by 1.5% to 1.8% a year for companies to hire workers on a permanent basis.

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Glattbrugg, Switzerland-based Adecco has kept a lid on costs during the downturn, so it is in good shape. The stock has risen about 43% in value in the past 12 months, closing Thursday at 75.65 Swiss francs ($84.26). Despite that outstanding performance, rivals Manpower and Randstad Holding both did better, climbing roughly 80% and 57%, respectively.

Adecco's shares trade at 16.6 times forecast 2014 earnings of 4.55 Swiss francs per share, which is favorable compared with multiples of 18.3 at Manpower and 17.3 at Randstad. Adecco, which has a market value of more than 14 billion Swiss francs, is projected to earn 3.71 Swiss francs per share on revenue of almost 24 billion Swiss francs in 2013.

Adecco looks like it still has room to go higher. Its stock can add as much as 10% more in 2014, especially if it makes progress on improving its profit margin, which was about 4% in the first nine months of 2013. It is targeting 5.5% in 2015.

The company can benefit also from returning cash to investors. It has announced share buybacks in 2012 and 2013 totaling 650 million euros. With a clear focus on shareholders, there could be other opportunities along the road.

Adecco clearly is a work in progress.