Kforce’s stock price has taken a beating over the past six months, shedding 20.5% of its value and falling to a new 52-week low of $42.61 per share. This may have investors wondering how to approach the situation.
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Even with the cheaper entry price, we’re swiping left on Kforce for now. Here are three reasons why we avoid KFRC and a stock we’d rather own.
With nearly 60 years of matching skilled professionals with the right opportunities, Kforce (NYSE:KFRC) is a professional staffing company that specializes in placing technology and finance experts with businesses on both temporary and permanent bases.
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Kforce struggled to consistently increase demand as its $1.41 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of poor business quality.
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Kforce, its EPS declined by 13.1% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Kforce’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Kforce falls short of our quality standards. After the recent drawdown, the stock trades at 15.4× forward price-to-earnings (or $42.61 per share). At this valuation, there’s a lot of good news priced in – you can find better investment opportunities elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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