I might be onto something
By Paul Meeks
Charleston is a wonderful place in many respects. I know. I chose to settle here, and this Yankee has lived everywhere including abroad. However, Charleston is no business mecca. Our economy is not properly diversified. We are too dependent on serving drinks at upper King Street restaurants and on tourists who cross Calhoun Street heading south on foot or on a Palmetto Carriage looking for souvenirs or for their hotel rooms.
No surprise, we have few public companies headquartered in the Charleston area. Unfortunately, one of them, Daniel Island’s Benefitfocus (BNFT), has been unceremoniously in the news recently, as it has been accused of financial shenanigans by a large shareholder. As a career investment analyst who is always searching for moneymaking ideas, and as Citadel and College of Charleston faculty who works to bridge the gap between our schools and local companies to benefit our students, I make it my business to really know every public company in the Palmetto State. I often write about them in this column.
This Sherlock Holmes traveled to Goose Creek this week to visit HireQuest (HQI). This ticker symbol indicates that — eureka! — I found a hometown public company. But is it the real deal? I think so.
HireQuest is a franchisor of temporary staffing companies that place mostly blue-collar workers like construction laborers. Interestingly, it has a franchise model such that most of its public and private competitors have company-owned offices from which they dispatch workers. HireQuest’s asset light model — which is the best kind according to business analysts — has allowed it to broaden its reach nationally from a headquarters in Goose Creek with around 45 employees. (And, folks, I have been to their office. It is not glamorous. It is quite the opposite. And that is a good thing.)
The company has successfully “rolled up” competitors with company-owned branches that had struggled to be profitable. Since HireQuest does not have their middlemen expenses, it can buy these zombie businesses on the cheap and quickly and effectively (at least thus far) integrate them in accretive deals. “Accretive” is what we Wall Street knuckleheads refer to as acquisitions that immediately add value instead of mergers that are “dilutive” to the acquirer’s core business and their profits often for too long. HireQuest’s 2019 merger with Command Center is the deal through which it became a public company. In that transaction, on day one they squeezed $4 million in costs out of a business with $95 million in sales. The target went from burning to building cash. The merger quickly paid for itself. Again, I see more opportunities for HireQuest to do accretive deals.
Here may be the best measure of HireQuest’s viability. Obviously, demand for construction workers, which is the company’s biggest served segment, collapsed during COVID-19. It has dug partway out of that hole, but that industry has not surfaced yet. In 2020, HireQuest still made money and generated cash. They have already announced two acquisitions in 2021. This tiny company even has surplus cash to pay a dividend. What impressive performance in the worst of times!
HireQuest is small but successful. Since it only records as revenue royalties from its franchisees, its sales in its most recently reported quarter (which ended Sept. 30, 2020) were just $3.4 million. But here is the thing: $2.0 million of that was profit even after paying Uncle Sam his $404,000 share. This fighter may not be a heavyweight contender, but pound for pound he is awfully tough.
The firm’s balance sheet is strong too. Of its $39.6 million in current assets sits $10.3 million in cash. It also has a line of credit at Truist Bank. Best of all, there is no debt here. Thus, we have “dry powder” for more accretive mergers; and if they are done right, and it appears that HireQuest has a knack for this, I say “do it.”
Cash is king. It always has been, and it always will be. No surprise, HireQuest generates ample cash because although it is highly profitable it has little need for its cash with its asset-light franchiser business model.
This stock trades at $15.25 (Feb. 24, 2021). It is +129 percent over the past year versus “only” +24 percent for the S&P 500 and +40 percent for the Russell 2000, which may be a better benchmark for HireQuest because it is such a small company ($207 million market capitalization).
Yep, unless I am missing something, this one looks good, but as always, I will keep an eye on it for you.
Paul Meeks, CFA, manages the Wireless Fund (WIREX) and is a portfolio manager at Independent Solutions Wealth Management. He also teaches at The Citadel and at the College of Charleston. He is on Daniel Island.