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GEE Group Inc.; Want to Like it, but... My Fair Value Estimate:



·Abbreviations:

o My Estimate of Fair Value (MFV)

o Return on Invested Capital (ROIC)

o Liquidation Value = Tangible Book Value (TBV)

o Book Value (BV)

o Operating Income (OI)

o Enterprise Value (EV)

o Price-to-earnings ratio (P/E)


GEE Group (AMEX:JOB) is engaged in the staffing industry. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before we get to those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.


Pros:

·The P/E is <10

o I love cheap stocks, and for others that do too, this is most likely the measure of relative value they are using

·The company is also cheap using OI/EV (~.14), my preferred relative value measure

·The % of shares short is <5%

o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company

·The company’s debt relative to its Market Cap is <25%

·The company does not have options, forcing those who want long exposure to buy shares


Cons:

·Diluted share count is up >1000% over 5 years

·Operating Profit Margins are down sequentially and year-over-year

·BV has decreased over 5 years


Those pros and cons and—more importantly—the company’s average ROIC (-3% over the last 10-years) make it seem unlikely that the company has durable competitive advantages. So, I deem the company not good quantitatively and value it relative to its liquidation value, TBV of $0.25. Given the not good designation, the company’s seemingly excellent balance sheet, and 5-yr average multiple of BV x 1.1**, I think TBV x 1.1 is a reasonable fair value, which equates to MFV of $0.27.


At a recent price of $0.49, the differential between market value and MFV is 81%, thus I think shares are overvalued.


Conclusion: GEE is a good example of why I use a rules-based system (https://www.veriteventures.com/post/what-is-investing). In my first thirty seconds of analysis, I saw three things I liked: 1)staffing companies are known for flexible cost structures which allow them to right-size through industry cycles 2)the share price plummeted recently, i.e. maybe it’s a bargain and 3)shares look cheap when measured by P/E and OI/EV. But, by sticking to my rules/process, it becomes clear that GEE is uninvestable for me. The degree of share dilution over 10 years is massive, which is probably indicative of an unhealthy business. Combine that with negative ROIC over 10 years and a major drop in BV over 5 years and I’ll pass.


It does seem like business has improved (ROIC is positive over shorter time periods), so it’s possible the business is undergoing a paradigm shift. More likely, this stock is only a candidate for mean reversion investing, and the historical dilution is a deal breaker for me when considering mean reversion candidates. So, I’ll pass at the current—or any—price.


My positioning: None


For more information about how and why I designate companies not good read here: (https://www.veriteventures.com/post/how-i-value-most-assets-companies)


-V


*Post prepared using data as of 1/5/23

**I’m using the company’s historical Book Value multiple as a proxy for Tangible Book because TB is <=BV and BV multiples are more readily available from data providers.

The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.


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