A quality executive compensation plan reduces the risk of investing in Robert Half International
Fifteen stocks made the July Exec Comp Aligned with ROIC Model Portfolio, available to members beginning July 14, 2022.
Summary of June selections
The Exec Comp Aligned with ROIC model portfolio (+0.7%) outperformed the S&P 500 (+0.4%) from June 15, 2022 to July 12, 2022. The best performing stock in the portfolio rose 11%. Overall, eight of 15 Exec Comp Aligned with ROIC stocks outperformed the S&P 500 from June 15, 2022 to July 12, 2022.
This model portfolio only includes stocks that have an attractive or very attractive rating and align executive compensation with ROIC improvement. I think this combination provides a unique list of well-selected long ideas because return on invested capital (ROIC) is the primary driver of shareholder value creation.
New Feature Stock for July: Robert Half International
Robert Half International, Inc. (RHI) is the featured stock in July’s Exec Comp Aligned with ROIC model portfolio.
After falling in 2020 due to lower demand for its services due to the pandemic, Robert Half’s net operating profit after tax (NOPAT) in the last twelve months (TTM) exceeded pre-levels. the pandemic. Longer term, Robert Half has grown its revenue and NOPAT by 6% and 14% compounded annually, respectively, over the past ten years. See Figure 1. The company’s NOPAT margin increased from 4% in 2011 to 9% TTM, while capital turnover improved from 3.7 to 5.2 over the same period. Rising NOPAT margins and capital turnover have increased the company’s return on investment from 15% in 2011 to 48% TTM.
Figure 1: NOPAT and Robert Half Revenue Growth: 2011 – TTM
Executive compensation properly aligns executive incentives
Robert Half’s executive compensation plan aligns the interests of management with those of shareholders by linking performance share units (PSUs) awarded to the company’s three-year cumulative ROI ranking against a peer group.
Robert Half’s inclusion of ROIC as a performance objective has helped create shareholder value through increased ROIC and economic benefits. Robert Half’s return on investment increased from 30% in 2017 to 48% over TTM and the company’s economic profits increased from $309 million to $559 million over the same period.
Figure 2: Robert Half ROIC: 2017 – TTM
Robert Half is undervalued
At its current price of $84/share, RHI has an economic price-to-book (PEBV) ratio of 0.9. This ratio means that the market expects Robert Half’s NOPAT to fall permanently by 10%. That expectation seems overly pessimistic for a company that has grown NOPAT by 14% compounded annually over the past 10 years and 9% compounded annually over the past two decades.
If Robert Half’s NOPAT margin falls to its pre-pandemic (2017-2019) three-year average of 8% (vs. 9% TTM), and the company increases NOPAT by just 4% compounded annually over the next 10 years, the stock would be worth $100/share today, an increase of 19%. Discover the calculations behind this reverse DCF scenario. If the company develops NOPAT more in line with historical growth rates, the stock has even more potential.
Critical Details Found in Financial Documents by My Company’s Robo-Analyst Technology
Below are details of the adjustments I make based on Robo-Analyst’s findings in Robert Half’s 10-Qs and 10-Ks:
Income statement: I made adjustments of $78 million, with the net effect of removing $44 million of non-operating revenue (1% of revenue).
Balance sheet: I made adjustments of $1.6 billion to calculate invested capital with a net decrease of $439 million. One of the largest adjustments was $1.0 billion (65% of reported net assets) in deferred compensation assets.
Valuation: I made adjustments of $476 million with a net effect of decreasing shareholder value of $64 million. Besides total debt, the most notable shareholder value adjustment was $206 million in excess cash. This adjustment represents 2% of Robert Half’s market capitalization.
Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation for writing about a specific stock, style, or theme.