Hudson Highland Group (HHGP) – Value Opportunity

Hudson Highland group is a specialized staffing agency. They provide permanent and contract based staffing solutions. Hudson was spun-off from Monster Worldwide in March 2003. That being said, the staffing industry is neither the most exciting industry nor is it unsatisfactory. The near term industry outlook is volatile, however, the longer term outlook is stable; people will always need jobs, just like they have in the past. For that reason I believe that HHGP’s past earnings record is sufficiently representative of the future to use it as a guide. As of right now the stock has a 51 M market cap and is trading at $1.93 per share.

First and foremost, the balance sheet in the recent quarterly report shows 46 million of cash and 11 million in borrowings. This leaves 35 million in net cash. Right away you can separate that cash from the operating business. If you take the cash value out of the market cap you are left with a value of 16 M for the operating business. This is far too low and I will show why.

The income account has been muddled up the past few years due to all sorts of reorganization expenses and acquisition integration expenses. The value of the company should be determined based on a valuation of each of the separate segments. The regional segments are Hudson Americas, Hudson Europe and Hudson Asia Pacific.

SEGMENT VALUATION

Hudson Europe and Hudson Asia Pacific are both satisfactory businesses that are profitable, even in the current climate. The loss reported as earnings is primarily a result of reorganization and losses suffered by Hudson Americas. The different segments should be valued separately.

I will allocate corporate overhead expenses roughly based on percentage of revenue basis for the purpose of valuation. Corporate overhead of 30 M is allocated as follows:

-Hudson Americas: 25% = 7.5M
-Hudson Europe: 37.5% = 11.25M
-Hudson Asia Pacific: 37.5% = 11.25M

I believe that the 2008 results are at minimum representative of the company’s long-term earning power because of the difficult climate. In other words, earnings going forward are likely to average at least as good as 2008 results.

Hudson Europe earned roughly 14 M in 2008 after adjusting for reorganization expenses and goodwill impairment charges. After deducting corporate expenses, after-tax earnings for Hudson Europe are roughly 4 M. Since the business has in fact grown over the last 5 years I’m inclined to use a satisfactory multiple of about 8. This gives the segment a value of 32M.

Hudson Asia Pacific earned roughly 14M in 2008 as well after adjustments. After corporate expenses income after-tax is roughly 4M. The valuation here is similar to Hudson Europe and I will also use a multiple of 8. This gives the segment a value of 32M as well.

Hudson Americas earned roughly -0.4M in 2008. After corporate overhead expenses the segment lost about 5.6M after-tax. This is not a horrible result considering the environment. Of course, if the segment were to continue losing money, it would have no going-concern value. Because Hudson Americas is borderline profitable I am inclined to say that the segment is not valueless. If it were trading in the market alone it would probably be valued based on current assets plus a premium for the prospect of profitability. At worst, I’d say this segment is worth 0, however, there is an embedded option which gives the chance for significant upside if the segment becomes profitable.

TOTAL VALUE

The total equity value is net cash + Hudson Europe + Hudson Asia Pacific + Hudson Americas. This calculation results in a value 35M + 32M + 32M + 0M (with possibility of upside) = 99M. At the current market cap of 51M this stock is trading at 50% of it’s value, leaving a wide margin of safety as well as a probably large gain.

US DOLLAR HEDGE BONUS

In addition, deriving the majority of sales overseas, the company is pretty good hedge against the US dollar which is likely to decline over the next 10 years.

Disclosure: I own shares of HHGP.