Whether to jump onboard a soaring stock or wait for a pullback is typically one of the hardest decisions an investor has to make. Theoretically, a disciplined investor will set a buy price and patiently wait until it hits. But, this strategy also means one has to be comfortable with possibilities such as never investing or adjusting limit prices higher.
The stock price for HR solutions provider, Insperity (NSP), has gained over 90% in the past six months and is finally slightly higher on a year-to-date basis.
In September, I suggested the pullback below $65 may be opportune.
After topping $70 routinely throughout August, shares have slipped below $65. Potential investors would be wise to consider taking advantage of the opportunity.
The share price hasn’t slipped below $80 since November 3rd. Identifying a potential pullback trigger beyond natural market fluctuations could aid investors still trying to establish or build a position in Insperity.
The Second Quarter Run
Insperity reported better-than-expected second quarter results in early August.
All three drivers, including worksite employees paid from new sales, client retention and net losses in our client base from layoffs and hiring, were better than expected. Worksite employees paid from new client sales were approximately 20% above forecasted levels driven by a 15% increase in trained Business Performance Advisors and success in our mid-market segment. Client retention held up at our historical high level of just over 99% during Q2. Net losses in our client base in Q2 were lower than expected as the level of worksite employees laid off, returning to work from furlough and general hiring were all favorable.
The company then increased its full-year guidance. The average number of worksite employees paid was upgraded approximately 1.6% at the midpoint. The range for adjusted EBITDA improved 5.4% at the midpoint. The range for adjusted diluted earnings improved 9.35% at the midpoint.
Third Quarter Projections
Although the increases to full-year guidance were significant, the projections for the third quarter may have seemed less optimistic. These projections reflected expectations that the latter half of the year would trail the second half of 2019 as well as the first half of 2020.
Third quarter adjusted EBITDA was projected in a range of $29 million to $38 million compared to $51 million in 2019. Adjusted diluted earnings were projected in a range of $0.37 to $0.54 per share compared to $0.75 per share in 2019.
The wild card here is in our direct costs and particularly our health plan where some portion of lower cost experienced in Q2 is expected to shift to Q3 and Q4. This creates an unusual quarterly pattern to our profitability for 2020, shifting more of the profits to the first half than usual.
The shutdown slowed the delivery of all but essential healthcare procedures. As deferred treatments were caught up, Insperity expected those costs to hit the last half of the year.
Although the pandemic-driven circumstances make us appropriately cautious about the near term, recent events have made us even more bullish about the long-term prospects for Insperity.
Third Quarter Results
Insperity reported third quarter results on November 2nd. Revenue of $1.01 billion declined 3.4% from the $1.04 billion in the 2019 third quarter. The average number of worksite employees paid was 231,750, a 3.8% decline from the average of 240,939 in the 2019 third quarter. Year-to-date, the average number of worksite employees was basically flat at 232,553 in 2020 compared to 232,825 in 2019.
Insperity again updated full-year guidance. The average number of worksite employees was updated from a range of 228,500 to 233,200 with a midpoint of 230,850 to a range of 233,500 to 234,000 with a midpoint of 233,750. The average number of worksite employees paid for all of 2019 was 235,547. Thus, Insperity is expecting a slight decline of less than 1%.
Adjusted EBITDA in the third quarter was $57.56 million, a 12,5% improvement to the $51.2 million in the 2019 third quarter and a staggering 72% improvement compared to the prior quarter’s guidance midpoint at $33.5 million of the $29 million to $38 million range.
Year-to-date, adjusted EBITDA at $250.8 million has already outpaced 2019 production of $250 million. It increased 19.8% in the first three quarters of 2020 compared to $209.3 million in 2019. Updated guidance for adjusted EBITDA for all of 2020 improved from a range of $235 million to $255 million with a midpoint of $245 million to a range of $271 million to $281 million with a midpoint of $276 million.
Adjusted diluted earnings in the third quarter were $0.91 per share, a 21.3% improvement to the $0.75 per share in the 2019 third quarter and double the prior quarter’s guidance midpoint at $0.46 of the $0.37 to $0.54 per share range.
Year-to-date, adjusted diluted earnings at $4.15 per share matches adjusted diluted earnings for the full year of 2019. The total increased 16.2% in the first three quarters of 2020 compared to $3.57 per share in 2019. Updated guidance for adjusted diluted earnings for all of 2020 improved substantially from a range of $3.67 to $4.04 per share with a midpoint of $3.86 to a range of $4.35 to $4.53 per share with a midpoint of $4.44 per share.
The bottom line for the third quarter was that we experienced the ideal combination of higher volume and pricing and lower direct and operating costs. (emphasis added)
Finishing Out 2020 Beyond the Numbers
From a positive perspective, Insperity’s client retention rate is consistent with its historical average of 99%. The company is also quite pleased with its ability to onboard new clients, despite the hardship of virtual sales calls:
Our booked sales since the pandemic have been approximately 70% of our pre-pandemic sales budget.
Benefits of partnering with Insperity became evident during the pandemic.
A recent study by McBassi & Company found that clients of Professional Employer Organizations (PEOs) had better business outcomes during the first few months of the COVID-19 pandemic than comparable companies not outsourcing to a PEO.
PEOs quickly became well-versed in assisting clients with navigating the PPP (Paycheck Protection Program) program created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The McBassi study found “PEO clients were more than twice as likely to receive PPP Loans than comparable small businesses.”
Specific to its client base, Insperity credited the government’s assistance with the optimistic recovery experienced thus far.
In retrospect, the CARES Act, specifically the Paycheck Protection Program, was effective in mitigating some level of layoffs. Further, we believe our quick and effective support of our clients to take advantage of these programs played a role in fewer layoffs occurring and a faster rebound.
The volume of many HR and payroll job functions, such as managing sick leave, health care benefits, time tracking while working remotely and even lay-offs and unemployment benefits, were amplified during the pandemic. PEOs, including Insperity, continued to offload these responsibilities from clients awash in the vulnerability of trying to keep their businesses afloat.
As businesses reopen and recover, Insperity and other PEOs and HR solutions providers are well-equipped to assist small businesses in finding new talent.
From a cautious perspective, Insperity continues to expect health care expenses to shift from the first half of 2020 into the last quarter as a result of deferred and delayed treatments.
A Cloudy 2021 Model
When all is said and done, most are hoping the COVID-19 virus will subside and “normal” business levels will resume – hoping 2020 will simply be an anomaly, an outlier in the trend lines.
As already outlined, Insperity is actually the type of business positioned to benefit from any lessons learned during the pandemic. But, when it comes to projections, the company hinted it would be cautious.
As you’re aware, there continues to be uncertainty as to the duration and the conditions of the pandemic and the trajectory of the economy, the current political environment and the timing and details of any further government stimulus amid this uncertainty. We have taken this into account when providing our financial guidance over the remainder of 2020 and we will be considering these factors in our budgeting process for the upcoming year. (emphasis added)
Comparatively, analysts, on average, are estimating 4.4% revenue growth for 2021. However, the projection on the bottom line is less optimistic. Analysts’ average estimate for adjusted diluted earnings for the full year of 2020 is $4.46 per share. But, for 2021, analysts’ average earnings estimate is only $3.86 per share, a 13.5% decline. Volume and pricing should continue to improve. But, the bottom line may continue to bear some of the deferred costs from 2020.
Insperity is not expected to provide projections for 2021 until it reports full-year results in early February. Should Insperity’s projection align with analysts’ average estimate for adjusted diluted earnings, it is quite reasonable to expect the market to react with a fierce pullback. Astute investors will take advantage of the opportunity to establish or build a position.
Disclosure: I am/we are long NSP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I belong to an investment club that owns shares in NSP.