o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Operating Earnings (OI)
o Enterprise Value (EV)
o Price-to-earnings Ratio (PE)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
Kforce 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 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.
·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 appears to have an easy year-over-year OI comparison in the coming quarter
·The company’s balance sheet seems good, and BV has grown nicely over 5 years
The company didn’t generate any negatives on the scorecard
Those pros—and more importantly—the company’s average ROIC (~21% over the last 10-years) make it seem likely that the company has durable competitive advantages. So, I deem the company good quantitatively. I am willing to assume—speculate—that durable competitive advantages will allow the company to grow earnings over time and therefore I value the company relative to $85.3mm OI, my estimate of what the company can reasonably earn over an average year. Given the company’s seemingly good balance sheet and 5-yr average multiple of PE x 17.7**, I think OI x 10 is a reasonably conservative fair value, which equates to MFV of $39.03.
At a recent price of $58.25, the differential between market value and MFV is 49%, thus I think shares are overvalued.
Conclusion: I like the historical ROIC and BV growth. I like staffing companies, since they are known for having flexible cost structures which can help navigate downturns. I like that the company didn’t generate negatives on the scorecard. I valued the company two years ago, and MFV is 63% higher now. I like that too. But, I don’t like the current price (I didn’t like the price two years ago:( and that’s most important to me. This is the potential downside of rules-based investing (https://www.veriteventures.com/post/what-is-investing). I will miss out on some winners and good companies waiting for an entry point that meets my risk tolerance. But, I don’t need to own this company, especially at this price. There is something else out there waiting for me to find it at the right price, so I will keep looking for it and put KFRC on a watchlist in case the price drops.
My positioning: None
For more information about how and why I designate companies good read here: (https://www.veriteventures.com/post/how-i-value-good-companies)
*Post prepared using data as of 1/16/23
**I’m using the company’s historical PE multiple as a proxy for OI because PE multiples are more readily available from data providers and because I will never pay more than the lessor of 1) OI x 10, 2) OI x the company’s own historical multiple, or 3) the S&P 500’s current OI multiple, which lessens the risk of over overestimating the company’s historical multiple via the PE to OI conversion.
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.