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A Quality Exec Comp Plan Lowers The Risk Of Investing In Robert Half International

Fifteen stocks made July’s Exec Comp Aligned with ROIC Model Portfolio, available to members as of July 14, 2022.

Recap From June’s Picks

The Exec Comp Aligned with ROIC Model Portfolio (+0.7%) outperformed the S&P 500 (+0.4%) from June 15, 2022, through July 12, 2022. The best performing stock in the portfolio was up 11%. Overall, eight out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P 500 from June 15, 2022, through July 12, 2022.

This Model Portfolio only includes stocks that earn an attractive or very attractive rating and align executive compensation with improving ROIC. I think this combination provides a uniquely well-screened list of long ideas because return on invested capital (ROIC) is the primary driver of shareholder value creation.

New Feature Stock for July: Robert Half International

RHI

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 the pandemic-driven decline in demand for its services, Robert Half’s net operating profit after tax (NOPAT) over the trailing-twelve-months (TTM) has risen above pre-pandemic levels. Longer term, Robert Half has grown revenue and NOPAT by 6% and 14% compounded annually, respectively, over the past ten years. See Figure 1. The company’s NOPAT margin rose from 4% in 2011 to 9% TTM, while invested capital turns improved from 3.7 to 5.2 over the same time. Rising NOPAT margins and invested capital turns drove the company’s ROIC from 15% in 2011 to 48% TTM.

Figure 1: Robert Half’s NOPAT & 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 tying awarded performance share units (PSUs) to the company’s three-year cumulative ROIC ranking relative to a peer group.

Robert Half’s inclusion of ROIC as a performance goal has helped create shareholder value through rising ROIC and economic earnings. Robert Half’s ROIC improved from 30% in 2017 to 48% over the TTM and the company’s economic earnings rose from $309 million to $559 million over the same period.

Figure 2: Robert Half’s ROIC: 2017 – TTM

Robert Half Is Undervalued

At its current price of $84/share, RHI has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects Robert Half’s NOPAT to permanently fall by 10%. This 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 three-year average (2017 – 2019), of 8% (vs. 9% TTM), and the company grows NOPAT by just 4% compounded annually over the next 10 years, the stock would be worth $100/share today – a 19% upside. See the math behind this reverse DCF scenario. Should the company grow NOPAT more in line with historical growth rates, the stock has even more upside.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I make based on Robo-Analyst findings in Robert Half’s 10-Q’s and 10-K:

Income Statement: I made $78 million in adjustments, with a net effect of removing $44 million in non-operating income (1% of revenue).

Balance Sheet: I made $1.6 billion in adjustments 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 $476 million in adjustments with a net effect of decreasing shareholder value by $64 million. Apart from total debt, the most notable adjustment to shareholder value was $206 million in excess cash. This adjustment represents 2% of Robert Half’s market cap.

Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation to write about any specific stock, style, or theme.