Randstad Holding NV: Valuation and Investment Analysis

Introduction

Randstad Holding NV is one of the largest temporary and contract staffing agencies in the world. Based in the Netherlands, it offers temporary staffing across a number of levels, including middle and senior management (Google Finance 2009). Randstad is organized into five divisions: temporary staffing, permanent placement and specialties, management professionals, employee professionals, and interim projects (Google Finance 2009). It offers a range of services including HR consulting and solutions aimed at improving labor flexibility, retention, productivity, and efficiency (Google Finance 2009). The Randstad Group is a diverse enterprise that operates on a global basis. The following analysis explores the valuation of this company and its investment potential.

Over the past year, Randstad's stock price demonstrated little deviation from major market indices. In comparison with its major competitor, Adecco, it also experienced many of the same fluctuations. In general, the performance of Randstad's stock can be characterized as typical of the various instruments used for comparison. Averages for the indices have been normalized for comparison purposes (Yahoo Finance UK 2009).

Share Price Performance

Randstad is a large company with exceptionally diverse holdings, which helps to stabilize its stock price. Each sector of the company accounts for only a small percentage of total company assets. Therefore, a loss in one sector does not affect the whole. When viewed in greater detail alongside major company news and events, Randstad does not appear to react unpredictably to negative news or setbacks. The stock tends to track major indices without considerable volatility.

When a stock chart shows major movements, one must attempt to identify events that may have triggered them. An examination of news and events from the Randstad website does not reveal any single major event that can fully explain the two most significant downturns in stock price. One key difficulty with this type of analysis is that stock price reactions often lag the triggering event by several weeks. No single events were identified that could independently explain these stock price movements.

Unemployment is the key indicator that directly affects Randstad's operations. Downturns in the economy reduce demand for staffing agencies. The two major downturns observed over the past year correspond to downturns in the global economy. According to Merens and Gionotten (2009), demand declined in 7 out of 9 of the major markets in which Randstad participates. These declines were organically produced and were not the result of actions by Randstad itself. Job growth or decline has a direct effect on Randstad's stock price, as the staffing industry is dependent on employment growth and economic prosperity for stability.

The best strategy against shocks caused by changes in employment levels is diversification. This is sound practice from a risk management perspective. In most cases, diversification produces greater stability and helps avoid negative reactions in stock price. However, the situation that Randstad faces — along with the rest of the world — is unusual in its scope and scale (Whitehouse.gov 2008). The current economic situation is producing declines in job growth on a global basis, which is unfavorable for all staffing agencies. Nevertheless, due to its size and global market share, Randstad is well positioned to weather the current crisis. Its risk reduction strategy will be the key factor in its ability to withstand these global shocks.

When discussing the market value of a global giant such as Randstad, it is difficult to devise a single accurate valuation method. There are many factors that must be taken into consideration when valuing a multi-sector conglomerate. The recent acquisition of Vedior NV created a combined company with annual sales of approximately 15.9 billion euros (Kanner & van de Pol 2007). Often, shareholders do not have sufficient information to make an accurate determination of market value. The reported market value of Randstad is approximately 15 billion dollars.

The approach taken to valuation can produce significantly different results. Every investor develops their own valuation method, and one of the central questions is what constitutes value. From an accounting perspective, value is related to return on assets and financial performance. However, the question on every investor's mind is not what the company is worth today, but what it will be worth in the future. Accounting can provide a snapshot of the present and describe historical trends, but it cannot accurately predict every factor that may influence the future. For instance, the global economy is largely to blame for recent stock price dips, but there is no guarantee as to which direction it will move going forward.

Investors use their valuation methods to make predictions about the future direction of a company. Factors such as corporate strategy, the competitive landscape, and general economic conditions all affect future corporate value. The goal of the shareholder is to grow their own value over time through dividends and capital appreciation. The question on every stockholder's mind is whether they can trust the reported numbers.

Company Valuation

The reported value of Randstad is over 15 billion euros. Information regarding long-term debt is not provided to the public in the annual report, which means one cannot calculate the Net Asset Value (NAV) using the publicly available data. The NAV method also suffers from the fact that differences in accounting methods can affect results, and differences in the accounting treatment of intangible assets — such as goodwill or brand equity — can distort the final figure. Furthermore, the NAV method ignores the earning power of a company's assets.

The Price-to-Earnings (P/E) ratio compares the price per share with the earnings per share and indicates how quickly a firm will recover its current share price through earnings. P/E ratios are evaluated by comparing them to industry and market medians, with higher ratios associated with growth stocks. According to Hoovers (2009), Randstad's P/E ratio in 2008 was 277.78, compared to an industry median of 18.76 and a market median of 21.98.

This exceptionally high P/E ratio might lead an investor to regard Randstad as a particularly lucrative growth stock. However, like NAV, the P/E ratio is susceptible to accounting distortions that may overstate profits. Companies that wish to inflate their stock price can manipulate their P/E ratio to appear more attractive to investors, creating a conflict between corporate interest and shareholder interest.

EBITDA is another measure used to value a company, reflecting profit before deductions for interest, taxes, depreciation, and amortization. Randstad's reported EBITDA grew from 267.80 million euros in 2004 to 744.00 million euros in 2008, with a stated goal of an average EBITA margin of 5–6% (Randstad Annual Report 2009). Company analysts consider this ratio sufficient to maintain the company's financial position while continuing to invest (Randstad Annual Report 2009). The company sets separate EBITDA targets for each of its three major divisions. According to the company, downturns in Germany and the United States hampered their ability to meet these goals (Randstad Annual Report 2009). EBITDA is subject to the same potential distortions as the P/E and NAV methods.

Discounted cash flow (DCF) is another widely used valuation method. Randstad is a complex company given the number of different markets and financial instruments it employs. The company uses its own hybrid method for computing its discount rate, applying a rate of 9% (Randstad Annual Report 2009). However, sufficient detail was not provided to verify whether this figure is accurate. Like other valuation methods, DCF is mechanical in nature and struggles to account for shocks such as the current economic downturn. The further into the future the projection extends, the less reliable accurate estimates become.

Reuters (2009) lists a Beta of 1.20 for Randstad relative to the Amsterdam Stock Exchange. Other financial websites do not list a Beta for this company, possibly because Randstad is listed on several exchanges globally, and there may be significant differences in Beta across those exchanges. Currency differences may also produce varying results. In this case, Beta is not a fully reliable means of assessing company performance, though it does usefully illustrate Randstad's dependence on the global economy.

The Shareholder Value Added (SVA) approach defines value as corporate value less the value of debt, focusing on the change in value over time. It is typically calculated across several periods using debt and equity figures for each period. Like other methods, however, it becomes less accurate over the long term — the further the projection extends from the base period, the less reliable the output.

Each of the valuation methods discussed has drawbacks in terms of presenting an accurate picture of the company. NAV, P/E, EBITDA, and Beta analysis are all mechanical in nature and provide useful supplementary information, but none is dependable as a sole basis for valuation. The future depends on many factors, and shareholders cannot rely solely on quantitative analysis to make decisions. Qualitative considerations — such as the competitive outlook, economic trends, and management quality — also shape a company's future. Most of these methods are most useful for short-term forecasts and all become less reliable as the time horizon extends.

Many companies restrict themselves to a single type of financing strategy. However, this is not the case with Randstad. The type of financing used depends on the country and the size of the project being considered, with different rates applied to different purchases depending on where in the world the project takes place. The primary documented example of Randstad's financing instruments is the acquisition of Vedior, which was financed partly through shares and partly through debt financing of the cash component (Randstad Annual Report 2009).

Randstad tends to finance using floating rates, operating under the assumption that floating rates are generally lower than fixed rates (Randstad Annual Report 2009). To protect against potential shocks, the company maintains a set of contingency actions for severe market conditions. The underlying assumption is that when economic downturns threaten earnings, interest rates will be lowered to compensate (Randstad Annual Report 2009). In general, this has proven to be the case, and it is assumed that contingency plans exist should this pattern not hold. All financing decisions and analyses are managed by the Group Treasury Department — a centralized approach to financial decision-making that is relatively uncommon in large corporate settings.

Dividends are one of the key instruments that shareholders consider when making investment decisions. They add value to a stock purchase by transforming it from a purely value-based investment into an income-producing one, offering investors something beyond projected increases in share price. However, dividends also represent a liability to the company and are typically paid when strategically necessary to attract or retain shareholders.

Randstad updated its dividend policy in 2007. The revised plan included a floor of 1.25 euros per share and consistent dividend growth through the economic cycle (Randstad Annual Report 2009). The payout ratio was set at 40–60% of net profit, adjusted for amortization of acquisition-related intangible assets (Randstad Annual Report 2009). This was considered an attractive dividend structure. Randstad tested the policy against the risks associated with the Vedior acquisition and concluded that even in a worst-case scenario, it could still meet its dividend obligations (Randstad Annual Report 2009). However, market conditions deteriorated beyond what had been anticipated, and the company was forced to forgo dividend payouts to shareholders for 2008 (Randstad Annual Report 2009).

This outcome illustrates one of the inherent risks of investing: circumstances beyond a company's control can prevent expected returns. The real question is whether this failure to pay dividends will affect shareholders' future investment decisions. The shortfall was not caused by mismanagement but rather by the deterioration of global markets. Whether shareholders accept this explanation or hold it against the company will influence Randstad's ability to attract investment going forward.