Throughout this year, the rising strength of the labor market generally imposed obstacles for employment staffing agencies such as Kelly Services (NASDAQ:KELYA). Without casting aspersions, the reality of the staffing business means sector players must fleece the flock. However, shifting economic undercurrents suggests that those thinking ahead of the game should reconsider this space. Therefore, I am bullish on KELYA stock.
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Jobs Report Lays Framework for KELYA Stock
Fundamentally, jobseekers have a clear incentive to search for employment on their own. Because staffing agencies take a cut for connecting employers with prospective job candidates, it’s obviously beneficial for both parties to cut out the middleman. Therefore, at first glance, the latest official jobs report might not seem favorable for KELYA stock. However, it likely lays out the framework for upside success.
Specifically, the June jobs report showed that the labor market added 209,000 new opportunities. Notably, this tally fell short of economists’ forecast calling for the addition of 240,000 jobs. However, 209,000 employment opportunities added is still a sizable figure. Also, the nuances of the latest print suggest that those who want a job can easily get one.
Two factors seemingly impose challenges against KELYA stock. First, the unemployment rate declined slightly to 3.6% from 3.7% in May. Second, average hourly earnings increased by 0.4% in June. With the government revising May’s wage growth figure higher to the same rate, employers apparently dangle higher wages to attract prospective workers.
Taken as a whole, Kelly Services appears to suffer from fading relevancies under this environment. Also, with wage growth essentially holding steady, employers again are cutting out the middleman. Rather than hiring a staffing firm, they’re attracting the best talent through wage increases.
It’s no wonder that KELYA stock only gained 2.4% since the beginning of this year. Nevertheless, that’s probably not the end of the story.
Kelly Services May Get an Assist from the Fed
Although the headline print of the jobs report implies a positive backdrop for individual jobseekers, the granularity of the data suggests that the Federal Reserve might get serious about stubbornly-high inflation. Should the central bank succeed in its efforts to spark disinflation, KELYA stock could become surprisingly relevant.
During the last few months, the Fed demonstrated that it aimed to facilitate gentle disinflation, that is, disinflation without sparking mass job losses. As evidence, policymakers skipped imposing a rate hike in June. However, with the latest employment reading showing a condition of more dollars chasing after fewer goods, current market sentiment suggests a general belief that the Fed will raise rates later this month.
If so, central bankers would effectively be taking the kiddie gloves off regarding their battle with rising consumer prices. Also, as the Fed becomes more aggressively hawkish, the labor market might not get off so easily.
In turn, higher borrowing costs may fuel mass layoffs, thus adding desperation to the labor market. That would likely catapult KELYA stock, as the underlying firm not only offers white-collar services but also connects workers to “manual” opportunities such as warehousing and manufacturing.
If the Fed gets serious about inflation, beggars won’t be choosers. This framework should cynically bolster KELYA stock.
KELYA Stock is on the Discount Rack
From a financial perspective, exposure to KELYA stock isn’t just about banking on rising fundamental relevance. Rather, shares can be had for an objective discount.
Right now, the market prices KELYA stock at a forward (projected) multiple of 11.55. In contrast, the underlying business and consumer services sector features an average forward multiple of 21.37. With multiple sectors – such as technology – incurring significant hype earlier this year, this earnings discount might not be something astute investors will pass up.
Also, KELYA trades at 0.13 times trailing-12-month sales. On the other hand, the underlying sector features a sales multiple of 1.69. Sure, revenue for Kelly Services slipped recently because of the robust labor market. However, with shifting circumstances, KELYA appears to be a bargain.
Is Kelly Services Stock a Buy, According to Analysts?
Turning to Wall Street, KELYA stock has a Moderate Buy consensus rating based on two Buys, zero Holds, and zero Sell ratings. The average KELYA stock price target is $25.00, implying 44.2% upside potential.
The Takeaway: KELYA Stock May Benefit from a Pivot
Throughout most of this year, the resilience and robustness of the labor market made KELYA stock rather irrelevant. Since jobseekers could apparently find work easily on their own, they didn’t need middleman services. However, the possible Fed’s hawkish intervention may add desperation to the labor force. Frankly, that would probably change everything for Kelly Services.
