Fri, 5 Oct 2012 | By Kean Marden, head of business services equity research, Jefferies International

Stock market investors are continually trying to predict the future and determine to what degree it is reflected in current share prices. October provided a tremendous intellectual challenge, with political change imminent in China and the US combined with renewed evidence of the strains in the real economy in a challenging Q3 earnings season. Overall, equity markets have emerged from this challenge unscathed, trading near to recent highs.

The FTSE 100 index has drifted by 1% over the past two weeks. On an aggregate basis, the recruitment sector has tracked sideways but within this share price movements have fallen into three broad camps: the UK is flat, the US has rallied and Europe is down.
Notable declines include Adecco (-6%), Randstad (-5%) and USG (-5%). In contrast, US recruiters head the leader board with Manpower (+6%) and Robert Half (+4%).

An important contributory factor behind these movements has been trading updates from Manpower and Randstad. Manpower’s Q3 profitability was 16% above consensus estimates and management’s Q4 guidance was also well ahead of expectations, driven by better than expected gross margins and strong cost control. At the divisional level, revenue growth in most regions was in line with guidance with momentum improving in the US and deteriorating in France.

Conversely, although Randstad’s Q3 profitability also exceeded expectations, albeit to a lesser degree than Manpower, management flagged an accelerating decline in France and Germany from mid-September. This revelation shouldn’t have surprised investors but over the next few days Adecco, USG and Randstad’s share prices all pulled back by 5-10%.

Elsewhere, Capita hosted its first analyst/investor day for several years in early October and focused on its more cyclical and transactional divisions rather than the outsourcing activities for which it is better known. The specialist recruitment business contributes only 5% of group turnover and is often buried within the group’s results so it was helpful when divisional managing director Dawn Marriot-Sims provided an overview.

In common with many other public sector recruiters, Capita has experienced a revival in activity over the past nine months and the gross fee growth rate has rebounded to a healthy 15% year to date. If any of you are hoping to sell your business in 2013, Capita wants to participate in market consolidation and typically target bolt-on acquisitions with £5m-20m value.