Stockwatch: A momentum play if economic recovery lasts

According to oil prices and other macro data the world is tilting to deflation, meanwhile international recruitment agency Robert Walters implies business is going gangbusters. So, what's the truth?

The stock has doubled since I drew attention three years ago at 177p and can reward contrarian thinking either way. In January 2012 it paid to defy cautionary noises from the recruitment industry after Walters' stock had halved. It began rising to re-rate especially in the second half of 2013 then traded volatile-sideways last year in a 270p to 360p range, currently 330p. Like many it has also benefited from QE teasing investors into higher-risk stocks during 2013 then gone into soul-searching mode.

Strong momentum continued in Q4 2014

In early December management cited annual profit to be "materially ahead of expectations" as a result of strong trading across all of the group's regions. That remains interesting on a macro view given the US economy - where Walters is barely represented - is known as the bright spot in a world of uncertainty.

The sense is the UK being close behind the US recovery if vulnerable to political uncertainty, while continental Europe is mired and there are questions over Asia. Yet Walters implies genuine industry confidence given it operates across the recruitment spectrum - permanent, contract and interim - i.e. its prosperity doesn't reflect a change to short-term contracts in a weak environment. It is largely exposed to the service sector - accountants, bankers and IT - but various multi-national firms are also a mainstay.

Their recruiting zeal contrasts with a recent sense in financial markets, multinationals are at risk from downturn in developing countries as the soaring US currency causes problems for dollar-denominated debts there. Walters is also capitalising on its investment actions of recent years, which will have enhanced operational gearing. Mind that its long-experienced management did add a caveat that it "remains cautious of the longer-term outlook given the current volatility in global market confidence."

This week it has quantified the Q4 2014 progress as an overall 17% increase in net fee income (in constant currency) with an exceptional 27% year-on-year increase in the UK - to £19.1 million or 34% of the £56.2 million total. This corresponds with a latest British Chambers of Commerce quarterly survey of 7,000 firms suggesting demand is rising at home and abroad with UK firms hiring staff at the fastest rate since records began in 1989.

However, "interest rates should remain where they are" as if the rebound quite reflects exceptional monetary policy, also governments "should do the right things". With the business community sceptical of Labour, the risk/reality of a centre-left coalition could herald uncertainty. It doesn’t exactly imply UK momentum has strong legs.

Walters' Asia Pacific operations have achieved 11% growth, doing well "in both well-established businesses such as Singapore, Japan and Malaysia and in emerging markets such as Indonesia, Taiwan, Thailand and Vietnam." There was also solid growth in Europe, up 13% amid "good performances from our businesses in Belgium and the Netherlands and a robust result in France, where our contract business continues to perform well." Some irony therefore, how the Eurozone is being reported as sinking back into deflation for the first time since 2009, as if consumers are likely to defer purchases.

So do raised forecasts imply an inflection point?

Company REFS shows all brokers following Walters upgrading forecasts in early December with 'buy' stances. Mind that even with the dividend covered only twice by earnings the prospective yield is about 2%, so much depends on judging the earnings dynamics. Just lately the company analysts have scrambled to keep up with Walters' progress, despite macro-economists being cautious.

The forward price/earnings multiple is in a mid-20's range even after the upgrades; this fundamentally high rating (for a cyclical) explains why the stock spent much of 2014 drifting down. One explanation for such contrasts could be, the more international-oriented professionals' jobs are less at risk currently than those caught in the "under-employment equilibrium" feared e.g. for Europe. Rising asset prices, helped by the US QE programme of recent years, may also have buoyed service industries.

If the European Central Bank belatedly embarks on its own form of QE, it's possible this gives all European shares a lift, and with Walters having reported strong trading the combined effect would be to help its stock grind higher. But it does then become more exposed to any of various major risks harming business sentiment.

Watch the directors' trades

Over years the Walters' executive directors have proved canny at concerted trades that are six to nine months later seen as astute. Their last was 10 June when three added a total 93,915 shares at 315p, and although the price dipped to 273p during the autumn their medium-term judgment has proven correct by way of strong Q4 2014 progress. On 17 October the non-executive chairman added 10,000 shares at 283.5p, similarly astute.

The chief executive - founder, Robert Walters - in particular tends to exercise care with his outlook statements and equity exposure, witness the caution about economic volatility in some of the group's largest markets. Ahead of results due 26 February the closed period will constrain share trading; but the directors' actions thereafter will need watching.

So at 330p this stock has further upside potential ahead of strong results due and the prospect of European QE. If the directors then guide forecasts even higher and hold onto their stock, it will retain its appeal as a momentum play. But any selling will emphasise how exposed is the rating versus economic risks lurking.

It's more interesting to long/short traders than investors seeking a tuck-away.

For more information see robertwalters.co.uk.