Should You Buy It: Manpower Has Muscle

Manpower(MAN Quote)) surprised investors with better-than-expected third-quarter results Oct. 14, which sent the stock nearly 7% higher to $73.97.

The temporary staffing firm earned $1.57 a share, which was 20 cents ahead of the consensus analyst estimate. Revenue rose 15% year over year to $5.3 billion and also came in $80 million ahead of expectations.

Sales in France and Italy, where the company generated 42% of revenue during the quarter, grew 14% from the previous year. On the other hand, Manpower earned just 9.5% of its sales in the U.S., where business declined 7.4% year over year.

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Manpower's foreign exposure should add about 10 cents a share to fourth-quarter earnings, thanks to the weak U.S. dollar. As a result, the company guided to fourth-quarter earnings of $1.50 to $1.54 a share, which was ahead of the previous consensus analyst estimate of $1.49.

Despite the blowout numbers, Manpower shares have come down with the broader market, and at Wednesday's closing price of $69.23, the stock is trading below where it was before the company reported earnings.

With that in mind, I'm here to answer readers' questions: Should you buy shares now in Manpower? Is this selloff a sign that Manpower's growth last quarter was unsustainable, or can the company continue to deliver on its targets and drive the stock higher?

At current levels, Manpower is trading 30% lower from its July highs. While the company warned in July that it will lose a favorable payroll-tax benefit in France (worth about 19 cents a share last quarter) by the fourth quarter, management also said Oct. 10 that it was the first foreign multinational firm to receive a license in China to offer temporary staffing services.

In fact, Manpower is on track to post 28% earnings growth in 2007 to $4.80 a share and another 17% growth next year. At Wednesday's closing price, the stock is valued at just 14.4 times expected 2007 earnings. That represents a 14% discount to the company's historical average valuation and a 10% discount to the average price multiple of the S&P 500.

Management is also supporting the stock with a $400 million share-buyback program announced in August. The company has spent more than $800 million repurchasing stock since 2005, and also recently boosted its semiannual dividend for the fourth straight year.

Manpower now pays out 37 cents a share every six months, indicating a 1.1% dividend yield. Investors at the close of trading Nov. 30 will qualify for the upcoming Dec. 14 payment.

I believe that the market has had enough time to digest the loss of Manpower's tax benefit in France, and that the stock is attractive to purchase at current levels. Despite the company's strong growth outlook, weak-dollar benefits, active stock-buyback program and dividend, its shares trade at a discount to the overall market.

Manpower should close this gap over the coming months, and I believe the stock can trade up through $80 by the first quarter of 2008.