Recommendation
The Staffing Group Ltd.: Well-Positioned After April’s ‘Fireworks’
By Michael Markowski, May 10, 2016
General developments occurring for the temporary-staffing industry since the beginning of 2016 — and specific developments for The Staffing Group Ltd. (TSGL) during April 2016 — have created an opportunity. The following are April’s developments for TSGL:
- On April 7, 2016, TSGL announced that as of April 1, 2016 it had acquired four staffing offices for cash, shares and a note in the aggregate amount of $2,915,000.
- A 13D filed on April 12, 2016, disclosed that Labor Smart (LTNC), and its affiliates, owned 58.7% of TSGL’s outstanding shares.
- In the filing of its annual report or 10K on April 13, 2016, TSGL disclosed that it had divested all of its calendar 2015 money-losing operations, and that it had significantly reduced its liabilities.
- In an April 25, 2016, letter to shareholders TSGL affirmed that the four staffing offices it had acquired as of April 1, 2016 were projected to produce $7.5 million of annualized revenue and $800,000 of EBITDA. TSGL disclosed it was anticipating that the North Dakota staffing- office acquisition — announced February 11, 2016 — would be a combination cash, note, and stock transaction, and would close in the third quarter of 2016.
With Labor Smart becoming the majority shareholder of TSGL, my analysis of the SEC filings and other information that I have obtained on both of the public companies, it appears that Labor Smart is focusing its assets and activities to build the revenue and profits of TSGL for the purposes of maximizing value for Labor Smart’s shareholders.
Capital raised from investors in 2014 at terms and conditions that were toxic and exponentially dilutive is the basis of Labor Smart’s decision to sell its offices and $7.5 million of its revenue to TSGL. The significantly dilutive fundings resulted in Labor Smart’s outstanding shares going from 22.3 million in April 2014 to 6.6 billion in April of 2016 according to its SEC filings. By selling some of its offices to another publicly traded staffing business, Labor Smart has figured out a way to escape the clutches of the toxic investors who have driven its share price down from $0.43 two years ago to a sub-penny price. I applaud Labor Smart’s management, especially its CEO, for coming up with this strategy to enhance shareholder value.
There is a video that was produced by Labor Smart, which states that the company’s entering into a relationship with TSGL is a “redo” to enable Labor Smart’s shareholders to benefit from the vision and expertise of its founder and CEO Ryan Schadel. In a discussion with Mr. Schadel, he told me that Labor Smart made a big mistake in accepting funds from investors under extremely onerous terms and conditions. He also stated that he had learned his lesson and that in the future as a CEO or majority owner of a company he would never again permit acceptance of investments under such conditions. He reiterated that the priority is to maximize the valuation of the TSGL to maximize shareholder value for Labor Smart shareholders.
A big challenge for many of the companies with low-priced shares or with shares trading on secondary over-the-counter exchanges is that the only financing source available to them is accessible from toxic preferred shares or debt. Because many operators who merge their businesses into public companies are neophytes of the capital markets they only learn about this risk after it is too late.
Because of the recent transactions with Labor Smart (LTNC), I predict that TSGL shares will outperform the stock market for 2016. The share price has the potential to increase by 80% or more by the end of 2016 as compared to its closing price of $1.70 on April 6, 2016. Based on the purchase of Labor Smart’s staffing offices on April 1, 2016 and TSGL’s announcing in February 2016 that it had entered into a letter of intent for its acquisition of a $6 million staffing business in North Dakota, TSGL has the potential to be generating annualized revenue of $13 million by the end of 2016.
There are several publicly traded staffing companies with similar gross profit margins that are significantly larger than TSGL, including Robert Half (RHI) and On Assignment (ASGN). Each generate several billion of revenue and have market caps that are equivalent to their annualized revenue. A competitor that is much nearer to the size of TSGL, General Employment Enterprises (JOB) that recently opted to deploy a “growth by acquisition” strategy, was most recently trading at 1.0 times its annual revenue. However, on April 13, 2016, the research firm SeeThruEquity, LLC projected that JOB will trade at 2.0 times its revenue by the end of 2016.
With the 1.0 times revenue peer comparisons and without an acquisition TSGL’s share price should already be at $6.25 based on its current 1.2 million shares outstanding. Assuming that during the second quarter of 2016 TSGL is able to raise $5 million of equity at an average price of $3.00 which would be equivalent to a discount of more than 60% to complete its North Dakota acquisition and for surplus working capital, it would have 3.0 million shares outstanding. Based on what TSGL disclosed about the equity component of the North Dakota acquisition and an average share price of $3.00 the most shares the company would have to issue to complete the acquisition would be 300,000.
My calculations indicate that TSGL could potentially have 3.3 million shares outstanding by the end of 2016. Since the company would also have $13.5 million in revenue its shares could potentially be trading for $4.00 assuming that its market cap is at 1.0 times its revenue. Should its market cap trade at 2.0 times its annualized revenue, TSGL’s share price could potentially be $8.00 by the end of 2016.
Additionally, in a February 2016 press release TSGL’s CEO stated that the company’s goal was to achieve the annualized revenue run rate of $75 million within 36 months. Based on the 33% utilization of equity in the formula that TSGL intends to utilize to make acquisitions in the $115 billion temporary staffing industry, TSGL’s share price has the potential to get to $20 per share by 2019.
Most analysts focus on financials and projections. The first thing that I do before considering recommending shares of a company is to examine its business and revenue model to gain a keen understanding. Because of previous success in recommending another staffing company, Uniforce, when I was a stockbroker on Wall Street, I am very comfortable with recommending TSGL or any small early-stage temporary staffing public company that meets my criterion. Uniforce was approximately the same size as TSGL and its share price was under $10 when I started recommending the shares. It was subsequently acquired for approximately $32 per share.
To obtain a better understanding of how vision and historical comparisons can be utilized to produce a multiple return on investment, please see the 12/17/87 “Senior Service Purchase Recommendation” that I co-authored. Senior Service was a start-up company for which I underwrote an IPO. When I discovered the company it had less than $1 million in revenue. My decision to finance and recommend Senior Service when it was in its developmental, or proof-of-concept stage was because its business and revenue model was very similar to that of KinderCare, which had been very successful. From conducting research on KinderCare in 1984, I had discovered that both its share price and revenue multiplied by more than 10 times from 1974 to 1983. Senior Service subsequently changed its name to Almost Family and the company has steadily grown to recent annualized revenue of $500 million. Shares trade on NASDAQ under the symbol AFAM and have increased by more than 1,000% since I launched its IPO. SCN’s Jane King conducted a 2 minute and 57 second video interview with me entitled, “Markowski Visionary Analyst 2 of 5”. The video appears at the bottom of this report, and provides details on my discovery and recommendation of Senior Service (Almost Family).
The $115 billion U.S. staffing industry is one of the lowest risk industries to invest in because it is both huge and very fragmented. The raising of the minimum wage by many cities and states has provided the industry a tailwind since the result will be a reduction in the number of full-time employees of small businesses. Those same businesses will utilize temporary staffing for occasions when additional human resources are critically needed. Finally, should the U.S. enter into a recession I predict that the temporary-staffing industry will benefit. Businesses will have no choice but to cut full-time workers and augment staffing with part-time help.
TSGL shares are very illiquid and trade on the OTC Pink, an exchange that specializes in listing penny and small-cap stocks. For this reason, I suggest that limit orders be utilized to purchase the shares. From my 40 years of experience in the financial markets I can unequivocally state that the best opportunities for an investor to make ten times their money over periods of 5 years, or less, can be found among those companies having shares trading on off-the-beaten-path exchanges.
The 4 minute and 43 second video below entitled, “Free Cash Flow Investing” reveals details about my simultaneously discovering and recommending two companies with share prices below $1 per share. The shares of both companies were very illiquid and were not trading on the NASDAQ or NYSE when I found them. Less than five years later the share prices of both companies multiplied by at least 20 times and their share volumes had increased exponentially.