Edmond Jackson's Stockwatch: Optimists should back Michael Page

Has mid-FTSE 250 recruitment stock Michael Page International just hit an inflection point to reverse its recent drift? Since the end of February the share price fell in a volatile channel from 507p to 418p, now engaging 440p after an update cited solid progress in all four of its global regions with strong performances from the UK, US and China.

Consensus forecasts as published in Company REFS (see table) need a pinch of salt - the numbers are jumping around daily which partly reflects latest forecasts being embargoed hence the "consensus" representing March/April estimates. So an approximate forward price/earnings multiple of about 20 times may reduce. Independent brokers' response to the update, include Jefferies and Canaccord Genuity both targeting 500p while RBS looks for 600p.

Recruitment typically lags the business cycle, e.g. it takes time for a recovery to build substance before firms are willing to hire more people. So unless the current one proves reliant on monetary stimulus or surprise events harm it, the recruitment upturn should have medium-term scope to continue.

Well-balanced

Page is exposed to a spread of "professional" occupations such as finance, engineering, legal, technology and marketing, 77% weighted to permanent recruitment versus temporary, with permanent growing at 9% on the year - 2% faster than temporary. This is well-balanced, although with 40% of gross profit (the key yardstick for a recruiter) deriving from financial jobs, the stock remains quite sensitive to confidence in the Square Mile, e.g. whether the tapering of monetary stimulus happens without upset.

Notably the institutional investor Capital Group has just lifted its stake in Page to over 5%, most likely because it seeks exposure to quality cyclical shares assuming a fair chance that global growth proves overall resilient. Timing-wise, recruitment ought to be a good play on this scenario and Page's update affirms so.

Sterling's strengh

The only headwind is currency translation for a UK company with majority operations overseas, as sterling strengthens. Gross profit in the EMEA region (Europe, Middle East and Africa) edged up only 0.3% on a reported basis albeit 5.2% at constant currencies, representing 41% of the group total.

The UK obviously was not affected by translation, rising 10.1% amid economic recovery and representing 26%. Asia Pacific and the Americas lagged after currency translation, down 5.5% and 4.4% respectively, albeit rising 7.8% and 11.8% at constant currencies. So valuation significantly depends on whether you take the more optimistic view of underlying dynamics or more conservatively, the eventual financial reckoning. The stockmarket is taking a "glass half-full" view which is fair if sterling consolidates and the recruitment cycle continues to improve.

Sterling's recent strength reflects anticipation of an interest rate rise, possibly later this year, but ignores political uncertainty with a general election 10 months (or less) away. Economic recovery has proved sooner and stronger than anyone predicted but this also may moderate. Currently the ideal equities portfolio is UK-oriented but in time the wisdom of having some international exposure may reassert itself. So the reasons why Page shares have drifted can quite easily change.

The chief executive's remarks add up to a scenario of growing momentum: "We are seeing more instances of candidate shortages in a number of markets and disciplines. This gives us confidence to continue our investment programme... Looking ahead, we expect to see market conditions remaining variable in Brazil and France and for Australia to become increasingly stable. The more positive environment in many of our other countries, both large and small, is expected to continue..." It would likely need a serious international shock to jolt this growing confidence; for example some China-watchers continue to warn its GDP growth is driven by excess credit creation that points to a sharp slowdown or continued unsustainable increase in debt; although China fears have persisted with no debacle as yet.

False optimism

The key risk to bear in mind is management's confidence being based on possibly six to 12 months' visibility - i.e. the outlook can still change in the medium term if economic indicators soften. A contrarian sceptic might argue this economic upturn has already run for five years and recruiters' optimism is falsely based on a last flourish; yet such a view includes the trough of a deep financial crisis and US/eurozone debt worries weighing in 2011/12. Seriously bad news would have to erupt to diminish the improving outlook.

Page's five-year chart has trended volatile-sideways reflecting the 2011/12 worries and 2012 performance being affected. The stock rallied with most others in early 2012, anticipating recovery, but the financial record shows this hasn't happened until recently and Page is not expected to regain its 2011 performance rates until early 2015; then significant momentum with near 30% earnings growth is targeted. So the company is only really getting into its stride now, despite its stock thrice trading over 500p during the last five years.

If dividend forecasts reflect guidance then the board likely doesn't want to reduce earnings cover below 1.5 to 2.0 times with respect to cyclical risks, implying a prospective yield of about 2.7% - so valuation largely rests on the earnings trend. Cash flow per share has however, generally been ahead of earnings and some investors/analysts may be putting more emphasis on a cash flow multiple instead.

So the decision to invest ultimately depends on your view of the wider global economy and whether it can avoid another major financial crisis - in which case Page is a quality cyclical to back.

For more information see www.page.com

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.