Paul Hill, one of Britain’s most successful private investors, picks the worst share tip from the press and brokers’ reports. This week: as we reach the top of the recruitment cycle, shares in a specialist recruiter look overpriced.
Turkey of the Week: Michael Page (MPI: 340p), tipped as a BUY by The Independent
These are gangbuster days for Michael Page (MPI), the specialist office recruiter. At last week’s trading update, the company reported record gross profits for the first half year that were 30% ahead of 2005. Additionally, the CEO announced that “there was no evidence of a slowdown in the UK” and “opportunities remain tremendous for continued growth”.
Nevertheless, this is a very cyclical industry. For instance, back in May 2001, the firm was handling 23,000 jobs, but two years later, after the 11th September 2001 atrocity, this figure had fallen by 40% to 14,000. Since then, the global economy has prospered and the current number of vacancies on its books has soared to 31,400. In particular, recruiters have benefited from a prolonged hiring spree by the City and the UK government, strong job creation in the US and a recovering European economy.
However, economic downturns tend to occur once a decade, with roughly seven good years followed by three bad, and I think we’re now getting towards the top of the recruitment cycle.
For example, last week’s June US unemployment numbers provided new evidence that companies are reluctant to bulk up their workforces in the face of high energy prices and slowing economic growth. In the UK, unemployment is on the rise, with the NHS and the automotive sector continuing to shed jobs, while Hays (competitor) and Johnston Press (job advertiser) have both recently issued bearish comments on the state of the UK job market.
The main bright spot is Europe, where employment prospects are improving, as companies start to take on staff again. But I do not see this generating explosive growth. Western European labour costs are still high compared to Asia and eastern Europe, where many of these new positions will be filled.
Don’t get me wrong – I’m not knocking Michael Page for the sake of it. I think it is a well-run business with a strong brand name, and it is respected in the City.
However, at 345p, the shares trade on 2006 and 2007 p/e ratios of 19 and 16 respectively, which I believe is simply too high. I would not have a problem with this lofty rating if the business was just emerging from a recession – as I would then expect profits to accelerate going forward.
I would value Michael Page on a ‘through-cycle’ p/e multiple of 15 adjusted for a 12% cost of equity. Indeed, if the EPS figures for the past eight years plus the City’s forecasts for the next two are averaged and discounted at 12% into today’s terms, then the shares would be valued at 222p.
Finally, four directors have sold stock at prices between 248p and 368p in the past 12 months.
Recommendation: follow the directors and SELL at 340p
Paul Hill’s personal portfolio has gone up by 483% over the past 5 years. To find out more about his specialist share-tipping service, ‘Precision Guided Investments’, click on the link below: