Michael Page International - Over or underpriced?

In general I would expect recruitment companies to trade at a discount during this long recession, and some of them are. But the shares of Michael Page International (MPI) could be bucking that trend, and in some ways I can understand why.

The business has had a fantastic decade, growing at a rate of around 13% a year over that time. You can see from the chart below how the company’s earnings and dividends have progressed in recent years.

Although earnings have been somewhat volatile, dividend increases have been much more reliable; and even though earnings have fallen from their peak, they still cover dividends almost twice over which is a positive sign if you’re looking for some income from your investments.

In addition to growth, I also like to see consistency in a company’s results because it makes it easier to understand how the company may develop in the future. In terms of the period covered by the chart above, Michael Page has produced record earnings in 5 out of 10 years, and record dividends in 7 out of 10 years. Compared to how the average company does, that sort of consistency is only ‘okay’, and not anything to get excited about.

Overall then this is a company which has grown at about 13% a year for quite a few years, and has raised its dividend or earnings to new highs fairly often, but not with the monotonous regularity of something like Tesco. However, the growth rate alone is enough to get me interested.

Valuations matter

Deciding whether a company is doing well or not is only one half of the investment game. The other half is the difficult bit – working out whether or not the shares are good value for money. Pay too high a price, and your results may end up being poor, no matter how good the company.

For Michael Page, this is where the investment case gets a little weaker.

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The first thing I like to see in an investment is a good yield, and that’s missing here. With the yield at less than 3%, investors can put their money into the safety of a FTSE 100 tracker and get substantially more than that.

This means that capital gains will have to make up for the income shortfall. With a historic growth rate of around 13% it looks like that might just happen when you consider that the FTSE 100 has grown earnings and dividends closer to 6% a year.

But there is a catch. At around 370p, Michael Page is current trading at 25 times its average earnings over the last decade. That is definitely growth company territory and it can be a risky level to buy in at. If the future growth of the company falters, there is a real risk that the shares could be re-rated downward by 50% or more.

That certainly isn’t fantasy as the shares traded below 200p just three years ago in the depths of the recession. In contrast, the FTSE 100 trades at less than 14 times the equivalent earnings average.

In short them, Michael Page appears to be a solid, highly successful business, generating a growing stream of profits and dividends; but at a price of around 370p, investors are heavily reliant on other investors maintaining the company’s bullish valuation.

What you have to ask yourself is: How likely is that?

>> I do not own shares in Michael Page International.