Thursday, July 3, 2008

Barrett Business Services Inc. (BBSI)

Welcome to my first post as a member of the Div-Net Network. Many of the members of the Div-Net site are fairly hard-core dividend people, while I lean a little bit more toward the Value Investing side.

What does this mean exactly? It means that although I do recognize the investing benefits of rising and recurring dividends, and the importance it has in the total return of stocks, I will buy stocks that have no dividends or falling dividends if it meets other criteria that makes it a Value Stock according to my requirements.

Barrett Business Services Inc. (BBSI) is a staffing company that I have been watching for about a year.

BBSI operates in two segments:

Professional Employer Organization (PEO) – the company enters into a contract to become a co-employer of the client’s existing workforce and assume responsibility for some or all of the client’s human resource management responsibilities.

Staffing - on-demand or short-term staffing assignments, long-term or indefinite-term contract staffing and comprehensive on-site management.

The stock has been beat up during the bear market we are in, and has fallen from a high of $26.00 about a year ago to $12.00. The chart below shows the sharp drops around earnings times:

The company has a number of attributes that I find attractive in a Value stock:

1) The company has no debt.

2) $56 million in cash, or $5.11 per share. This represents almost half of its market capitalization.

3) Insiders own 33% of the company, and William Sherertz, the Chairman, Chief Executive Officer and President of BBSI, owns 2.5 million shares.

4) Dividend yield of 2.7%.

5) A fairly obvious and transparent cyclical pattern around its business, so entry and exit points can be discerned.

What has hurt BBSI is its exposure to California, where 75% of its gross revenues originate. The economy in California is being affected more by the Housing downturn than other areas, and this is hurting the earnings and revenues of BBSI.

Also, as a PEO BBSI has exposure to Workmen’s compensation claims in California. This can be a problematic area as a recessions becomes more likely, or as management put it during the last conference call:

“Your unemployment rate is going to go up and your workmen's comp is also going to increase some. And what you want to avoid, if you can, is the very large claims...More people know if they're about to get laid off that they've got to survive somehow so they file a claim.”

The two mitigating factors for BBSI relative to the last recession are that BBSI has a much stronger balance sheet this time as I described above, and the company was much more staffing oriented in 2001. The staffing business tends to be more cyclical than the PEO.

However, I wouldn’t jump into BBSI just yet as I expect the price to go into the single digits as the economy in California deteriorates further.

Disclosure - No position.

This article was written by Stock Market Prognosticator. You may email questions or comments to me at


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