Labor Is a Bargain

Contrary to widespread belief, not all low-wage work in the U.S. is headed to India, China and other emerging nations. There is plenty of demand right here for workers who can haul, clean, dig, paint and perform other types of manual labor. Last year, Labor Ready, a temporary-staffing firm that focuses on blue-collar work, placed more than 600,000 people in 400 job categories.

Given the tight labor market (the unemployment rate is near a six-year low of 4.5%), investors should be clamoring for Labor Ready's inexpensive shares. At $19, the stock (symbol LRW) trades for just 14 times estimated 2007 profits and is down 30% from spring 2006, when the home-construction boom peaked. Skeptics fear that a prolonged housing downturn will weigh heavily on Labor Ready, which gets nearly 40% of its revenues from construction and landscaping.

But construction employment, which had been falling since August 2006, appeared to stabilize in December. Whether or not the housing market has bottomed out, Labor Ready says it can find work relatively quickly for those who have lost construction jobs. For example, in California, says chief executive Steve Cooper, a two-month effort to redirect sales teams into non-housing-related industries turned several months of falling sales a year ago into double-digit revenue gains in recent months. A similar effort, he says, is under way in the Southeast, which was hit hardest by the housing slump.

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Several trends favor Labor Ready's focus on manual labor. Blue-collar jobs account for 23 of the 30 fastest-growing occupations, according to the U.S. Labor Department. Temporary employment is expected to provide 1.6 million new jobs through 2014.

On-demand unskilled labor is a $7-billion-a-year business in the U.S. Demand comes from small and midsize firms in the hospitality, construction and transportation industries, among others. Labor Ready's 20% market share is more than twice as large as the shares of its top five rivals combined. Through acquisitions, the Tacoma, Wash., company has also moved into light-industrial temporary help, a $9-billion-a-year market, and into skilled trades, primarily building. Labor Ready says the jobs it provides pay hourly wages ranging from $6 to $7 for unskilled help to $12 to $18 for skilled trades. It collects a fee on top of the hourly wage for each worker it places, and it pays for worker's-compensation insurance.

Cooper says he believes that each of Labor Ready's nearly 900 branches can average $2 million in revenue, up from $1.4 million currently, through more-aggressive sales. And as the firm grows (250 new branches are planned for the next five years), cost efficiencies should bolster profit margins.

Analyst Clint Fendley, of Davenport and Co., an investment bank, notes that Labor Ready's price-earnings ratio is lower than it was in the recession year of 2001. Assuming that the P/E recovers to 17 or 18 over the next 18 months, he thinks the share price could reach $24 to $26.