Should I Do It? Administaff Not Worth the Premium

Even after a selloff, the business services outfit trades at a higher P/E than its peers and the S&P.
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The management of Administaff (ASF) has little room for error.

After disappointing investors with its guidance Tuesday, the stock fell more than 18%, closing at $47.25. However, the company, which provides outsourced payroll and other business services (like benefit, workers' compensation, personnel records management and recruiting) for small and midsized companies, is still up 12% for the year and 176% over the past 12 months.

With that in mind, I'm here to answer readers' questions: Should I do it? Was Adminstaff punished enough Tuesday that it can be bought here?

The company's first-quarter results, posted Tuesday morning, appeared benign enough. Profit of 37 cents a share was 3 cents ahead of expectations, as revenue grew 21% year over year to $360.6 million. Although management did not explicitly give second-quarter guidance, its projections for 98,500 to 99,000 average worksite employees and $221 to $224 of monthly gross profit per employee yield quarterly earnings of 32 to 34 cents a share. (Note, this also uses management's guidance for operating expenses, net interest income, effective income tax rate and the average outstanding shares.)

This is well short of the consensus analyst estimate of 37 cents a share, and the stock was punished as a result. Even after Tuesday's decline, Adminstaff continues to trade at 31.3 times the midpoint of management's new implied guidance of $1.47 to $1.55 a share, which is nearly twice the valuation of the benchmark

S&P 500

.

This compares unfavorably with fellow employer services firm

Gevity HR

(GVHR)

, which trades at 19.8 times expected 2006 earnings. Administaff even trades at a hefty premium to

Automatic Data Processing's

(ADP) - Get Report

21.9 calendar 2006 P/E ratio.

Want another potential red flag for Administaff? Even using the previous second-quarter consensus analyst estimate of 37 cents a share, the 32% projected annual earnings growth would have been the company's slowest expansion in six quarters.

According to Bloomberg, just one of 12 sell-side analysts who follow the stock rates it a buy -- compared with nine holds and two sells. Although it often pays to be a contrarian investor, this time I believe readers will be better served by heeding Wall Street's advice.

In other words, readers should not do it -- Administaff remains too expensive relative to its peers and the broader market. The stock should be avoided at current levels, as I believe it could ultimately drop below $40.

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David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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