Rating Update: Stock Rating D-Negative (4/12/19)-BG Staffing Inc (BGSF).

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BUSINESS

BG Staffing, Inc. provides temporary staffing services in the United States. It operates in three segments: Multifamily, Professional, and Commercial. The Multifamily segment offers temporary front office and maintenance personnel to the various apartment communities. The Professional segment provides skilled temporary IT professionals with expertise in SAP, Workday, Olik View, Hyperion, Oracle, project management, and other IT staffing skills, as well as finance, accounting, and related support personnel. The Commercial segment offers temporary workers for various skilled and unskilled positions primarily to manufacturing, distribution, logistics, and call center customers. The company was formerly known as LTN Staffing, LLC and changed its name to BG Staffing, Inc. in November 2013. BG Staffing, Inc. is headquartered in Plano, Texas.
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INVESTMENT RATING

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With future capital returns forecasted to be above the cost of capital, BGSF is expected to continue to be a major Value Builder.

BG Staffing has a current Value Trend Rating of D (Negative).
This rating combines consistent signals from two proprietary PTR measures of a stock’s attractiveness. BG Staffing has a neutral Appreciation Score of 53 and a slightly negative Power Rating of 33, and the Negative Value Trend Rating results.

BG Staffing’s stock is selling below targeted value. The current stock price of $22.06 compares to targeted value 12 months forward of $27.
This neutral appreciation potential results in an appreciation score of 53 (47% of the universe has greater appreciation potential.)
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BG Staffing has a Power Rating of 33. (This slightly negative Power Rating indicates that BGSF only has a better chance of achieving attractive investment performance over the near to intermediate term than 33% of companies in the universe.)
Factors contributing to this slightly negative Power Rating include: the trend in BGSF’s earnings estimates has been unfavorable in recent months; is in a slightly weakened position current; and recent price action has been neutral.

INVESTMENT PROFILE

BGSF’s financial strength is exceptional. Financial strength rating is 94.
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Relative to the S&P 500 Composite, BG Staffing Inc has moderate Growth characteristics; its appeal is likely to be to Income-oriented investors; the perception is that BGSF is lower risk. High earnings variability is a relative weakness for BGSF. BGSF’s valuation is low: high dividend yield, low P/E ratio, and moderate price/book ratio. BGSF has unusually low market capitalization.

CURRENT SIGNALS

BG Staffing’s current operations are strong. Return on equity is rising, reflecting: widening pretax margins; and rising leverage.

BG Staffing’s current technical position is very weak. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

BG Staffing Inc (NYSEAMERICAN: BGSF) has recently enjoyed small positive changes in fundamentals: significant quarterly earnings acceleration occurred.
The stock is currently rated D.
BG Staffing Inc (NYSEAMERICAN: BGSF) stock enjoyed a major increase of 16.4% on 4/12/19. The shares closed at $0.23. However, trading volume in this advance was exceptionally low at 46% of normal. The stock has performed in line with the market over the last nine months and has risen 0.9% during the last week.

CASH FLOW

In 2017, BG Staffing experienced a very significant reduction in cash of $0.00 million (). Sources of cash were much lower than uses. Cash generated from 2017 EBITDA totalled +$24.35 million. Non-operating uses consumed -$0.30 million (-1% of EBITDA). Cash taxes consumed -$8.66 million (-36% of EBITDA). Re-investment in the business amounted to -$25.44 million (-104% of EBITDA). On a net basis, debt investors supplied +$17.25 million (+71% of EBITDA) while equity investors received -$7.20 million (-30% of EBITDA).
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BG Staffing’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Bg Staffing Inc Peer Group. (Since 2014 Non-operating Income, %EBITDA has accelerated.) In most years, BG Staffing was in the second quartile. Currently, BG Staffing is at median at -1% of EBITDA (-$0.30 million).

BG Staffing’s Cash Taxes, %EBITDA experienced a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Bg Staffing Inc Peer Group. In most years, BG Staffing was in the top quartile. Currently, BG Staffing is lower quartile at -36% of EBITDA (-$8.66 million).

BG Staffing’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Bg Staffing Inc Peer Group. In most years, BG Staffing was in the lower quartile. Currently, BG Staffing is lower quartile at -104% of EBITDA (-$25.44 million).

BG Staffing’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by stability for the Bg Staffing Inc Peer Group. In most years, BG Staffing was in the lower quartile. Currently, BG Staffing is upper quartile at +71% of EBITDA (+$17.25 million).

BG Staffing’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Bg Staffing Inc Peer Group. In most years, BG Staffing was in the top quartile. Currently, BG Staffing is slightly above median at -30% of EBITDA (-$7.20 million).

BG Staffing’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Bg Staffing Inc Peer Group. In most years, BG Staffing was in the third quartile. Currently, BG Staffing is slightly above median at 0% of EBITDA ( $0.00 million).
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BG Staffing’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Bg Staffing Inc Peer Group. In most years, BG Staffing was in the lower quartile. Currently, BG Staffing is lower quartile at 0%.

PROFITABILITY

BG Staffing’s return on equity has improved very significantly since 2013 but it experienced a sharp decline after the 2015 high.
This very significant improvement was due to very strong positive trend in pretax operating return supported by strong positive trend in non-operating factors.
The productivity of BG Staffing’s assets remained stable over the full period 2008-2018: asset turnover has exhibited little to no overall change.
Additionally, pretax margin enjoyed a very strong overall uptrend that decelerated very sharply from the 2015 level.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
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BG Staffing’s return on equity is at the lower quartile (18.8%) for the four quarters ended September, 2018.
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Operating performance (pretax return on assets) is at the upper quartile (18.4%) reflecting asset turnover that is upper quartile (2.77X) and below median pretax margin (6.6%).
Tax “keep” rate (income tax management) is lower quartile (61.2%) resulting in after tax return on assets that is slightly below median.
Financial leverage (leverage) is substantially below median (1.67X).

GROWTH RATES

There are no significant differences between BG Staffing’s longer term growth and growth in recent years.
BG Staffing’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 2.3% per year.

Total asset growth has been 2.5% per year.

Annual E.P.S. growth has been -1.4% per year.

Equity growth has been 30.5% per year.

BG Staffing’s consensus growth rate forecast (average of Wall Street analysts) is 20.0% — substantially above the average of the historical growth measures.
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Relative to the Bg Staffing Inc Peer Group, BG Staffing’s historical growth measures are generally lower quartile. Equity growth (30.5%) has been upper quartile. Total asset growth (2.5%) has been lower quartile. Revenue growth (2.3%) has been lower quartile. E.P.S. growth (-1.4%) has been lower quartile.

In contrast, consensus growth forecast (20.0%) is upper quartile.
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PRICE HISTORY

Over the full time period, BG Staffing’s stock price performance has been quite good. Between December, 2014 and April, 2019, BG Staffing’s stock price rose +70%; relative to the market, this was a +20% gain. Significant price move during the period: 1) January, 2017 – September, 2018: +110%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 21.2% is substantially above median relative to the S&P 500 Composite.
In addition to being substantially above median relative to S&P 500 Composite, current annual total return performance through March, 2019 of 21.2% is upper quartile relative to BG Staffing Inc Peer Group.

Current 5-year total return performance is not available.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, BGSF’s overall valuation is normal. The highest factor, the ratio of enterprise value/assets, is near the upper quartile. Price/equity ratio is slightly above median. Price/earnings ratio is below median. Ratio of enterprise value/earnings before interest and taxes is near the lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
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BG Staffing has a very large value gap compared to the median valuation. For BGSF to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.86X to 1.03X. If BGSF’s ratio of enterprise value/revenue were to rise to 1.03X, its stock price would be lower by $5 to $27.
For BGSF to hit lower quartile valuation relative to the BG Staffing Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 0.86X to 0.71X. If BGSF’s ratio of enterprise value/revenue were to fall to 0.71X, its stock price would decline by $-4 from the current level of $22.

VALUE TARGETS

With future capital returns forecasted to be above the cost of capital, BGSF is expected to continue to be a major Value Builder.
BG Staffing’s current Price Target of $28 represents a +25% change from the current price of $22.06.
This neutral appreciation potential results in an appreciation score of 53 (47% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 53, the moderately low Power Rating of 33 contributes to an Value Trend Rating of D.
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BG Staffing’s current Price Target is $28 (+104% from the 2017 Target of $14 and +25% from the 04/12/19 price of $22.06). This dramatic rise in the Target is the result of a +17% increase in the equity base and a +75% increase in the price/equity multiple. The forecasted increase in cost of equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a large negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a huge positive impact.
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PTR’s return on equity forecast is 26.2% — substantially above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2013 and 2017. The current forecast is significantly below the 2013 peak of 74%.

PTR’s growth forecast is 12.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2013 and 2017. The current forecast is well above the 2013 low of 4%.

PTR’s cost of equity forecast is 12.0% — slightly above recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2013 and 2017. The current forecast is steady at the 2014 peak of 13.1%.
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At BG Staffing’s current price of $22.06, investors are placing a positive value of $15 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 18.0% per year, and a return on equity of 12.7% versus a cost of equity of 9.0%.
PTR’s 2019 Price Target of $28 is based on these forecasts and reflects an estimated value of existing assets of $13 and a value of future investments of $14.

About John Lafferty 31785 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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