TriNet Group Inc. (TNET, Financial), a company that provides human resources services for small and medium-sized businesses, wants more attention.
It has unveiled a new identity and is planning an "extensive" advertising campaign. In a news release announcing these initiatives, the company emphasized how it is partnering with famous photographer Anie Leibovitz and others.
For investors, a more relevant issue would be the effect it has on earnings and the share price.
In this discussion, I will look at key metrics, and then assess what these moves might mean for investors.
First, TriNet has a market cap of $5.08 billion and operates in five main areas:
If the identity or rebranding exercise is successful and the advertising campaign works, its revenue should grow even more quickly. The following chart shows how revenue has risen steadily, almost metronomically, to nearly $5 billion.
Revenues come in through two segments: Professional Service generated $754 million in 2022 (year-end Dec. 31), while Insurance Service brought in $4.13 billion.
TriNet’s biggest expense was insurance costs, which took $3.46 billion off the top line. Altogether, total costs and operating expenses were $4.38 billion, leaving just $499 million in operating income. After interest and taxes, net income of $355 million remains. That’s 7.30% of revenue, as shown in this visualization of the income statement:
Over three years, the average revenue growth rate is higher, averaging 12% per year.
During the same period, earnings per share without non-recurring items grew almost twice as quickly: 23.30% per year. I will come back to this relationship later.
The company does not pay dividends, but has bought back its own common shares: $500 million worth in 2022.
High returns have also turned it into a strong value creator. It generates more on its invested capital (equity and borrowed funds) than it spends on the weighted average cost of capital:
Currently, it has an ROIC of 27.14% and a WACC of 10.26%.
In a related vein, TriNet has a return on equity of 44.84%, calculated by dividing its net income by its total stockholders’ equity.
How did it keep the growth going in 2022? According to the 10-K for 2022, it acquired two companies and launched a new product line.
Now, the company appears ready to spend a significant sum on advertising, beyond what it has in the past. That would appear to be a good strategy, for several reasons.
First, we see that while revenue has grown by an average by an average of 12% per year over the past three years, its Ebitda and earnings per share without non-recurring items grew nearly twice as quickly.
Assuming this advertising is as cost-efficient as its previous marketing, then each additional dollar of revenue could generate significantly higher profits, whether as Ebitda or earnings per share without NRI.
Higher earnings should lead to higher share prices sooner or later, so this additional marketing could generate additional capital gains.
And the company needs to do something to boost its revenue and earnings. An analyst for Morningstar Inc. (MORN, Financial) is forecasting that earnings per share without NRI for 2023 will slip to $5.25 per share (from $5.56 in 2022). And for 2024, another increase to $5.70. I believe these estimates were made before the announcement of the new advertising campaign just days ago.
The company, in its 2023 guidance, said it expects total revenue to range between 2% lower and 2% higher compared to 2022. It does not offer a forecast on earnings per share.
Beyond the dollars spent on advertising, the company has expanded its footprint and needs to redefine itself to current and new markets.
CEO Burton Goldfield observed in an April 3 news release, “Over the course of the last few years, as we have witnessed extraordinary changes to the modern workplace, TriNet has responded with expanded offerings, such as HRIS and R&D tax credit services along with our core PEO offering, that truly power the success of small and medium-size businesses by supporting their growth and enabling their people.”
In the fourth-quarter and full-year 2022 release, Goldfield noted, “During the year, we made two important acquisitions which enable TriNet to offer PEO, HCM software products, and value-added services to better address our customers' needs throughout their business lifecycle.”
Given these changes, the rebranding and advertising campaign are good ideas. They allow TriNet to sell and cross-sell both its new and core services to small and medium-sized businesses. It is normally easier to sell to an existing customer than a new one, so new customers who sign up for one service are quite likely to add new products and services as they grow or look for new efficiencies.
Adding that to an already strong set of fundamentals may make both the top and bottom lines more attractive to investors.
