The Institute of Supply Management, a leading research firm, released a report this month saying that the services sector index grew in January for a third year of back-to-back monthly expansion. The sector reading came in at 55.2, in line with Reuters’ survey of economists. A reading above 50 indicates sector expansion. The index was below 50 in December 2009 as the US economy was beginning to recover from financial crisis and mild recession.
There are many services sector companies listed in the market. Among the investment merits for these companies include high profit margins, lower capital requirements and recurring cash flows. A personal service stock that has these qualities and trades at reasonable valuations is CBIZ, Inc. (NYSE: CBZ). The company provides professional business services, products and solutions. Its business operates in three segments; Financial Services, Employee Services and Medical Management Professionals. The companies known competitors are H&R Block, Inc. (NYSE: HRB), Intuit Inc. (NASDAQ: INTU) and JTH Holding Inc. (NASDAQ: TAX).
A couple of weeks ago, CBIZ reported its fourth quarter results. Revenue reached $172.9 million, 6 percent higher compared to the same period last year. This yields full-year revenues of $766.1 million. For the current fiscal year, management expects revenue to grow in the range of 7 percent to 9percent. Overall, management believes that it will continue to post positive results given the investments it made during the past few years.
Net income amounted to $1.2 million for the quarter. Full year net income reached $31.1 million, or diluted earnings per share of $0.63. The company expects to grow its earnings per share in the range of 12 percent to 15 percent for the current fiscal year. Over the next five years, analysts predict that earnings will grow by 12 percent a year.
Recent Acquisition Spree Support Earnings Growth
For the fiscal year 2012, the company closed 10 acquisitions with five acquisitions made in the fourth quarter. This will provide support on expectations of robust earnings growth for 2013. Management also said that it will continue its strategic acquisition and investment program for the coming years.
One recent acquisition was Payroll Control Systems, a company that provides payroll, time, labor and human resources services to more than 1,400 small and midsize clients. The acquisition is expected to reap revenues of $6 million a year. It will also result in increased operating efficiencies and additional sales talent for its payroll division. Prior to this acquisition, CBIZ bought assets of PHBV Partners, the employee benefit unit of Leavitt Pacific Insurance Brokers, ProMedical and Strategic Employee Benefit Services. Given the recurring cash flow of the company, it will continue to manage its acquisition program for the coming years.
At present, the stock trades at undemanding valuations of 11 times earnings. This is compared to HRB’s 19.64 times earnings and JTH Holding’s 16 times earnings. Over the coming years, its price will eventually catch up to its earnings growth as the company continues its value-accretive acquisitions.