When a particular company’s share price plunges after a profit warning, I will take a closer look to see whether the market has overreacted on that news. If the company has demonstrated an excellent operating history in the past, and the profit warning appears to just be a temporary issue, I’ll sometimes consider it a great opportunity to buy in.
Staffline (LSE: STAF), one of the leading recruitment companies in the UK, has plummeted over 70% since mid-May after issuing a profit warning. Today, I’ll look deeper into the company to explain why I believe Staffline is an excellent buying opportunity now.
Consistent growing operating performance
With a 9% UK market share in the recruitment and management sector, Staffline has provided more than 52,000 workers per day to more than 1,500 clients. It has two main operating segments: Recruitment, providing human resource to many industries, and People Plus, supplying skill training, and probationary services. While the Recruitment segment accounted for nearly 90% of the total revenue, its operating income only contributed 55% to the overall company profitability.
Staffline has demonstrated impressive operating performance since 2012. Its revenue has increased from £367 million in 2012 to £957.8 million in 2017, a 21.2% compounded annual growth. The company’s earnings per share (EPS) has experienced a higher annual growth at 25.5%, from 28.7p to 89.5p in the same period. With the excellent operating performance over the years, Staffline’s shareholders have been benefited from consistent growing dividend payment, from 8.10p in 2012 to 27p in 2017.
Market overreaction
In the middle of May, with Brexit uncertainty, Staffline issued a full-year profit warning. While the analysts expected the earnings before interest, tax and other adjustments to be around £43 million in 2019, Staffline revised that expectation to only £23 million-£28 million. I would estimate the net income, after interest and tax expenses, to be roughly £20 million for the full year.
The market has punished Staffline too hard, in my opinion. A nearly 50% earnings forecast reduction translates into a £200 million market capitalisation lost in less than a month. At the time of writing, Staffline is trading at 250p per share, with the total market capitalization of £64.5 million. Thus, the market values Staffline quite cheap, at only 3.2x its forward earnings.
Moreover, at the current price, the dividend yield is quite juicy, at 11.6%. As the company has had a record of increasing the dividend in the past, I expect more consistent dividend payments in the future. All in all, I think Staffline is a good opportunity for long-term income investors.
Foolish takeaway
I am quite confident that Staffline’s P/E ratio can get back to around 10x, leading to a possible share price increase to 780p, a potential 200% gain in the next few years.
