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  CDI purchase a bet on jobs recovery

BENJ GALLANDER and BEN STADELMANN

Monday May 10, 2010

While investors' attention has been diverted by fear of a possible Greek contagion, evidence of a global economic recovery is mounting. Manufacturing activity is rebounding, not just in growth hot spots like China, India and Brazil, but also in the U.S. and Europe. This has led the International Monetary Fund to raise its forecast for growth in world output, currently pegged at 4.2 percent for this year and 4.3 percent for 2011.

However, in many countries jobs remain scarce. That is not unusual; employment rates are a lagging indicator in the economic cycle. In this recession, companies cut workers particularly aggressively, spurred by the speed and breadth of the collapse of global trade in the wake of the financial crisis.

As conditions improve, corporations prefer to add temporary positions before committing to full time jobs. This caution is understandable, as doubt remains regarding the sustainability of the recovery once stimulus spending dries up and governments reverse course to repair their own tattered balance sheets. However, there will come a point when management sentiment will flip, and apprehension of a double-dip will be replaced by anxiety that more confident competitors are hiring the best workers.

It was the anticipation of this type of macro scenario that prompted the addition of CDI Corporation to the Vice-President's Portfolio at $13.75 (U.S.) in January. CDI is a staffing powerhouse, with emphasis on outsourcing for engineering and information technology. As well, its Management Recruiters International division is one of the world's largest recruitment organizations for executives, with franchises in over 35 countries.

Like many staffing firms of long standing, CDI's high watermark occurred during the Y2K hysteria: it booked revenue of $1.7 billion in 2000. In the following decade, sales remained above the billion-dollar level until the annus horribilis of 2009 wilted the top line to $885 million, and resulted in a rare bottom-line loss of $19.9 million.

CDI recently reported first-quarter results that were fairly tame and very close to break-even. Revenue in the engineering services division and MRI were weak, somewhat offset by a 12 percent gain in the IT solutions unit. But the outlook was upbeat, with management reporting more project bids and RFP activity. Guidance for second-quarter revenue was raised from $213.5 million to a range of $219.7 million to $226.2 million.

In the conference call, president and CEO Roger Ballou made a very interesting remark: "This is the first recession I've ever seen where productivity rose at the bottom of the recession, indicating that people had cut staff significantly more than the revenue drop, and what I think you're seeing people doing is first catching up to get back to where they've got the staff to handle the revenue that was in place, and now they're starting to staff up against the growth that's starting to occur. So at this point, all our evidence would indicate very strong upward momentum."

If Mr. Ballou's assessment is correct, we should see some impressive numbers over the next few quarters, as a hiring boom tends to be self-reinforcing, with newly employed workers supporting aggregate consumer demand. As employment conditions improve, disgruntled employees look to move on, and that turnover is also an advantage to companies like CDI.

Another nice thing about a service business like professional staffing is that it is not capital intensive. If run well, the enterprise throws off plenty of excess cash, which does not need to be reinvested. CDI shows this pattern, paying out a tidy annual dividend of 52 cents, yielding close to three percent. The balance sheet is a beauty, with no debt and cash of $76.2 million, which works out to about $4 a share. Even if the pace of recovery slows, this nest egg should keep the dividend safe. Almost a third of outstanding shares are held by insiders.

If CDI returns to its historical levels of revenue and profitability, then it is reasonable to assume that a return to its stock price over the past several years ought to be achievable. The sell target range that is eyed for this holding is $30 to $35, about a double from the current level of $15.85.


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