Employment is one of the best indicators of the health of the economy. Companies hire during growth periods and fire when it reverses. For this reason, recruitment companies are labelled “pro-cyclical” by professional investors. Their earnings surge when the economy is strong and plunge when it is weak.
Recruiters perch on the bleeding edge of the trend — they are “leading indicators”, to indulge in a second piece of jargon. So investors listened this week when London-listed Robert Walters proclaimed a slowdown had arrived. The chief executive after whom the group is named said profits for the year — although still a record — would be lower than expected.
This put a revealing gloss on a 20 per cent rise in fee earnings in 2022. These were a testament to the pressure inflation is putting on wages as much as the prowess of recruitment consultants. Fee earnings in Germany rose 28 per cent in the fourth quarter and France and Spain recorded double-digit growth.
But lockdowns in mainland China meant fees there in the final quarter of last year were 24 per cent lower than in 2021. Placements elsewhere are currently depressed by the tech downturn, with Amazon, Meta and Coinbase among the giants laying off staff.
The market has been bracing itself for a rout in recruitment. Other economic indicators suggest most big economies were in recession at the end of last year. Shares in Robert Walters have dropped 30 per cent since the start of 2022.
That coincides with record profits. But those are retrospective, while share prices are prospective. During the past two contractions, earnings per share for the group fell by three-quarters and by one-half respectively. Analysts, who are professional optimists, expect further profit growth this year, even so.
Their high earnings estimates and falling shares combine to create the illusion that shares are cheap. Robert Walters’ price to earnings multiple is currently at 10 times this year’s earnings, close to the bottom of its historical range.
Few investors are likely to interpret that as a reason to buy the stock — earnings estimates can fall quickly once a recession becomes certain. In the past it has taken about a year from peak earnings to the point when shares hit their cyclical low.
The stock will rally on signs of economic recovery. The shares have solidly outperformed UK-listed peers such as Hays and PageGroup over the past decade. This reflects a higher weighting to fast-growing Asian markets.
Finally, spare a thought for headhunters themselves. Headcounts at recruiters concertina in and out in with the economic cycle. Across the industry, there will be much nervous updating of LinkedIn profiles.
What does Barbie Florist have in common with the Abhorrant Ghoul King? Not much. But City data services such as Bloomberg lump brand owners Mattel and Games Workshop together in the same peer group. That way, error lies. Some businesses are unique. One-size-fits-all investment analysis is redundant.
Games Workshop is one of a kind. The Aim-listed business this week reported a £4.6mn drop in half year pre-tax profits to £83.6mn. It is best known for producing tiny plastic figures. Customers, mostly teenage or adult males, use these to play tabletop war games. The most popular of these are the Tolkienesque Warhammer and its sci-fi derivative Warhammer 40,000.
Reductively, Games Workshop might seem like just another toy company. But with due respect to Barbie, the real métier of the Nottingham company is more complex. It is to manage and exploit an escapist hobby giving participants extended access to a fantasy universe.
The difficulty of jamming Games Workshop into a top-down asset allocation is one reason that investment institutions gave the business a wide berth for years. For its army of private investors, the problem has been valuing a stock there is nothing to compare against.
The shares are up 260 per cent over five years for a market capitalisation of almost £3bn. That reflects impressive compound annual growth in earnings before interest, depreciation and amortisation of 30 per cent, as calculated by S&P CIQ.
East Midlands-style war gaming has been catching on in the US, assisted by pandemic lockdowns. Alex Chatterton, research analyst at Panmure Gordon, notes that recent visits to a Warhammer community website still comfortably exceed their pre-Covid level.
Games Workshop bosses have struggled in the past to temper the expectations of investors. This time chief executive Kevin Rountree bluntly told them the business had “nothing more to say at this stage” about a potential film and TV tie-in with Amazon.
Investors fresh to the company tend to obsess over potential licensing revenue, which so far has primarily been from video games. A more nuanced view is that the hobby and its spin-offs are synergistic if managed well. An Amazon drama would damage both if it is a flop.
A creditable fantasy series would support expansion of the hobby in the US. Given that possibility, the shares are decent value at 23 times next year’s forecast earnings. It is an irrelevance that Mattel trades at half that level. Better to compare apples and pears than orcs and beauty queens.
Lex Populi is an FT Money column from Lex, the FT’s daily commentary service on global capital. Lex Populi aims to offer fresh insights to seasoned private investors while demystifying financial analysis for newcomers. [email protected]