Volt, Deeply Ignored Staffing Company with a Tremendous Turn Around Opportunity

Volt Information Sciences (VISI) provides staffing, outsourcing, and IT services. The company’s business segments are staffing services (North American, International, Technology Outsourcing) and Corporate/Other.Founded in 1950 by the Shaw family, currently own ~20% of shares outstanding. Volt is the first public staffing company.

This potential outsized opportunity is based on multiple evolving factors.

Opportunties:

 * The 21 trailing month market value dropped -55.92%. This contrasts with a period of multiple operational and financial improvements. These contrasting attributes only strengthen Volt’s (VISI) case for short and long term mean reversion. The current market price is $3.65 per share or 76.39M.

During the trailing 21-month period, these are a few specific improvements. The sale of non-core businesses, management’s focus and realization of higher margins. Material investment in information technology to improve competitive position, operations and reduce costs. System implementation completed this quarter. Twenty months ago a new turnaround specialist and CEO (Michael Dean ) recruited with Board level changes forced by activist investors. Additionally, this quarter received a long awaited tax refund payment used to pay down debt. VISI sits on  146M federal NOL and 55M in other federal tax credits.

 * Positive macro industry trends exist for temporary staffing. Further, the industry’s fragmented attributes offer future MA activity for potential company sale of company or growth after a fully realized turnaround. Note today (07/31/17) staffing company CDI received a go private deal, up 33% today on news. Also, an engineering’sindustry study reported 2% of the workforce is temp. But, the current 2% workforce is a fraction of future years estimates of 10% based on macroeconomics and political trends. The trend higher for a fractionalized work force is inevitable.
Volt’s temporary staffing business is healthy and majority of total revenues. Technology and Engineering’s permanent staffing business drags on its profitable progress. Additionally, opportunities exist if they focus exclusively on temp staffing and sell permanent placement business.

* The current market price of $3.65 or 76 million market capitalization / 147M enterprise value does not fairly handicap management’s value unlocking activities, low business risk profile, capital light requirements and the higher probabilistic future value. Also, VISI is historical and relative valuation cheap. (more on this covered below).

* Management sits on an exceptional company requiring only modest improvements to grow its free cash flow with existing large revenue base. A small 1% improvement in operational margins is reachable. That change will indeed impact free cash flow and its tiny 76M market value with just 14.19M shares in the public float.

* Additional positive factors to consider, ~ 30% held by insiders with founding family at ~20% coupled with proactive/activist shareholders (Glacier Peak Capital as one example). This ownership structure will continue pushing market value enhancements. Moreover, the lack of analyst coverage is not helping the stock price. VISI TTM revenue of 1.289 Billion, 61.70 revenue per share deserves and should see future coverage. Lastly, positive 2016 and 2015 insider activity with neutral 2017.

Notable enhancing historical valuation attributes:
Strong and improving capital structure with a stable share count and debt reduction. Gross margin improvements and a stock that now trades at a 75% of the TTM gross profit. Another interesting ratio is EV/MC. My guess this should stay stable. But the market value dropped more than enterprise value may signal market overreaction.  Lastly, improving F score, asset turnover, and deep valuation discounts for EV/GP and EV/Revenue.
 

Relative Valuation

Click for quotes on the 18 industry competitors included in the table below (ZPIN,MHH,KFY,TBI,KELYA,BBSI,HSII,KELYB,DLHC,BGSF,JOB,EGL,CCRN,KFRC,RECN,CDI,HSON,VISI,STAF,DHX,)

Volt ranks at or near the lowest for the following. Percentage above 52 low, EV/Sales, shares short as percentage of float, market and enterprise value drop. High F score of 6, insider ownership, percentage off 52 high, financial strength. These metrics support the large discount thesis to the 18 industry staffing peers.

Long term activist shareholders with incentivzed insider ownership to turn around the company.

Risks: 

* Many uncertainties exist such as continued falling revenues, declining operational margins, growing losses. These negatives will impact liquidity and flexibility to buy back shares if operations don’t stabilize over the next few quarters. In addition, the longer time to realize profitability and stability significantly reduces the present value of VISI and confidence of shareholders.

 Long: VISI