Rating Update: Stock Rating D-Negative (12/3/19)-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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BGSF’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be an important Value Builder.

BG Staffing has a current Value Trend Rating of D (Negative).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. BG Staffing has a neutral Appreciation Score of 47 but a poor Power Rating of 28, producing the Negative Value Trend Rating.

BG Staffing’s stock is selling below targeted value. The current stock price of $20.88 compares to targeted value 12 months forward of $23.
This neutral appreciation potential results in an appreciation score of 47 (53% of the universe has greater appreciation potential.)
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BG Staffing has a Power Rating of 28. (This poor Power Rating indicates that BGSF only has a higher likelihood of achieving attractive investment performance over the near to intermediate term than 28% of companies in the universe.)
Factors contributing to this poor Power Rating include: the trend in BGSF’s earnings estimates has been unfavorable in recent months; recent price action has been slightly unfavorable; and is in a slightly weakened position current.

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 neutral Growth/Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that BGSF is normal risk. Relative weaknesses include: low historical growth, and high earnings variability. 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: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.

BG Staffing’s current technical position is mixed. The stock price is in a 5.8 month up move. The stock has appreciated 28.1% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

BG Staffing Inc (NYSE: BGSF) has recently enjoyed slight positive changes in fundamentals: significant quarterly earnings acceleration occurred.
The stock is currently rated D.
BG Staffing Inc (NYSE: BGSF) stock suffered a major decline of -33.3% on 12/3/19. The shares closed at $0.00. Trading volume in this decline was normal. The stock has been weak relative to the market over the last nine months and is unchanged during the last week.

CASH FLOW

In 2018, BG Staffing experienced a very significant reduction in cash of $0.00 million (). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$25.53 million. Non-operating sources contributed +$3.78 million (+15% of EBITDA). Cash taxes consumed -$3.86 million (-15% of EBITDA). Re-investment in the business amounted to -$7.58 million (-30% of EBITDA). On a net basis, debt investors withdrew -$26.89 million (-105% of EBITDA) while equity investors contributed +$9.02 million (+35% of EBITDA).
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BG Staffing’s Non-operating Income, %EBITDA has enjoyed a very strong 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 third quartile. Currently, BG Staffing is upper quartile at +15% of EBITDA (+$3.78 million).

BG Staffing’s Cash Taxes, %EBITDA has experienced a 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 at median at -15% of EBITDA (-$3.86 million).

BG Staffing’s Business Re-investment, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Bg Staffing Inc Peer Group. In most years, BG Staffing was in the lower quartile. Currently, BG Staffing is above median at -30% of EBITDA (-$7.58 million).

BG Staffing’s Debt Investors, %EBITDA has experienced a volatile 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 lower quartile at -105% of EBITDA (-$26.89 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 upper quartile at +35% of EBITDA (+$9.02 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 second 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 decelerating very sharply after the 2015 level.
BG Staffing’s very strong positive trend in pretax operating return significantly augmented by a very strong positive trend in non-operating factors is a significant analytical factor.
The productivity of BG Staffing’s assets remained stable over the full period 2009-2019: 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 very significant positive influence on return on equity.
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BG Staffing’s return on equity is slightly above median (22.7%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is upper quartile (18.6%) reflecting asset turnover that is upper quartile (2.77X) and at median pretax margin (6.7%).
Tax “keep” rate (income tax management) is at the upper quartile (78.0%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (1.57X).

GROWTH RATES

Overall, BG Staffing’s growth rate has slowed considerably 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 1.4% per year.

Total asset growth has been 1.5% per year.

Annual E.P.S. growth has been 6.2% per year.

Equity growth has been 27.1% per year. (More recently it has been 15.3%.)

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 erratic. Equity growth (27.1%) has been upper quartile. E.P.S. growth (6.2%) has been at the lower quartile. Revenue growth (1.4%) has been lower quartile. Total asset growth (1.5%) has been lower quartile.

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 in line with the market. Between December, 2014 and December, 2019, BG Staffing’s stock price rose +61%; relative to the market, this was a +7% 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 -21.6% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of -21.6% is substantially below median relative to BG Staffing Inc Peer Group.

Current 5-year total return performance of 16.7% is substantially above median relative to the S&P 500 Composite.
Through October, 2019, with substantially above median current 5-year total return of 16.7% relative to S&P 500 Composite, BG Staffing’s total return performance is upper quartile relative to BG Staffing Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, BGSF’s overall valuation is low. The highest factor, the ratio of enterprise value/assets, is above median. Price/equity ratio is at median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/earnings ratio is at the lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
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BG Staffing has a 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 0.81X to 0.94X. If BGSF’s ratio of enterprise value/revenue were to rise to 0.94X, its stock price would be lower by $4 to $25.
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 0.81X to 0.74X. If BGSF’s ratio of enterprise value/revenue were to fall to 0.74X, its stock price would decline by $-2 from the current level of $21.

VALUE TARGETS

BGSF’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be an important Value Builder.
BG Staffing’s current Price Target of $23 represents a +11% change from the current price of $20.88.
This neutral appreciation potential results in an appreciation score of 47 (53% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 47, the low Power Rating of 28 results in an Value Trend Rating of D.
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BG Staffing’s current Price Target is $23 (-49% from the 2018 Target of $45 but +11% from the 12/03/19 price of $20.88). This dramatic fall in the Target is the result of a +10% increase in the equity base and a -53% decrease in the price/equity multiple. The forecasted decline in return on 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. Partially offsetting these Drivers, the forecasted decline in cost of equity has a large positive impact.
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PTR’s return on equity forecast is 16.1% — significantly below our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2013 and 2018. The current forecast is significantly below the 2013 peak of 74%.

PTR’s growth forecast is 9.0% — slightly below our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2013 and 2018. The current forecast is significantly below the 2016 peak of 19%.

PTR’s cost of equity forecast is 9.1% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2013 and 2018. The current forecast is below the 2014 peak of 13.1%.
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At BG Staffing’s current price of $20.88, investors are placing a positive value of $3 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 13.0% per year, and a return on equity of 26.9% versus a cost of equity of 10.0%.
PTR’s 2020 Price Target of $23 is based on these forecasts and reflects an estimated value of existing assets of $14 and a value of future investments of $9.

About John Lafferty 54938 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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