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McIntire Investment Institute At the University of Virginia

McIntire Investment Institute At the University of Virginia. Barrett Business Solutions, INC. Ticker Symbol: BBSI. Adam, Naveed , Spencer| March 25, 2014. Stock Overview. Current Price: $61.51 Beta: 1.25 P/S: .83x P/B: 6.07x. Market Cap: $441.23 Million P/E: 25.42x

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McIntire Investment Institute At the University of Virginia

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  1. McIntire Investment Institute At the University of Virginia Barrett Business Solutions, INC Ticker Symbol: BBSI Adam, Naveed, Spencer| March 25, 2014

  2. Stock Overview Current Price: $61.51 Beta: 1.25 P/S: .83x P/B: 6.07x Market Cap: $441.23 Million P/E: 25.42x Industry P/E: 38.14x EPS: 2.42 Dividend Yield: 1.20%

  3. Business Overview • Founded in 1951 • IPO in 1993 • Headquartered in Vancouver, WA • 50 offices in 12 states • Focus on California and Pacific Northwest

  4. Business Overview • Two categories of service • Professional employment services (PEO) • The company becomes a “co-employer” of the client’s workforce, effectively outsourcing the client’s HR costs by contract • Staffing • Long and short term contracting of employees for clients, responsibilities include recruiting and hiring • PEO sector increasing in proportion of revenue, to 73.0% in 2013.

  5. Business Overview • Operates domestically, using physical branch locations to target local small business. Concentrated in West. • 19 California • 11 Oregon • 5 Utah • 5 Washington • …

  6. Business Overview

  7. Thesis Points • Increased regulation causes a growth in demand 1 • Structured to work better with small companies 2 • Clean Financials to support growth plan 3

  8. Growth in Demand • Delayed implementation of the ACA will require excessive paperwork and bureaucracy from employers: BBSI specializes in compliance and legal technicalities. • HR is becoming more and more complicated, increasing the value of a specialist (BBSI).

  9. Growth in Demand • BBSI’s focus on small businesses makes it attractive to companies with fewer than 50 employees, which do not have to provide healthcare under ACA. These companies will want to remain under 50 employees, and will hire contractors like BBSI to minimize HR staff, and to minimize ACA costs of existing employees.

  10. Growth in Demand • States like California with poor environments for welcoming business (#39 by Forbes) (#1: VA) require firms to jump through more hoops per employee. Small businesses benefit from BBSI’s specialization in outsourcing HR in these states.

  11. Strategic Advantage

  12. Strategic Advantage

  13. VAR “Paychex consistently makes mistakes when dealing with our office. They have sent us insurance information for other clinics, made numerous errors when processing checks, and often neglect to fix their mistakes. The only reason we are still their client is because there are very few good alternatives. ADP is just as bad.” Ata Motamedi, Motamedi & Associates

  14. Growth and Financials

  15. Growth and Financials • Gross revenue grew at 32.33% in 2013 • PEO revenue growth: 40.9% • Driven by a 9.9% growth in number of clients and a 10.2% growth in revenue from existing clients • Staffing Services revenue growth: 13.6% • Driven by growth in revenue from existing clients as well as a small growth in number of clients • 74% of gross revenue from California operations, compared to 69% in 2012

  16. Growth and Financials • Management is expecting 24% growth in gross revenues for Q1 2014 • Planning for mid to high 20’s percentage point growth in the near future • Growth again will likely come from increased client base and shift to more lucrative PEO market

  17. Growth and Financials • Growth Strategy • BBSI is focusing on growth through penetration in existing markets • Management believes that growth is achieved through increased brand awareness caused by more widespread branch infrastructure • Future strategy includes penetrating new markets with new business units and branches

  18. Growth and Financials • Infrastructure expansion • BBSI plans to build 8 new Business Units and 2 new Branches in first half of 2014 • New branches located in California and Nevada • New locations are intended to increase penetration in the company’s existing markets

  19. Growth and Financials • Growth plan supported by strong financial solvency • Balance Sheet • Current ratio: 1.44 • Debt/Capital: 6.78% • Income Statement • No interest expense • Free cash flow of $66.1 million, up 57% from 2012 • Steady dividend growth since introduction (2006)

  20. Margins • Net margin comparison: • ADP ($36.84b): 12.05% • PAYX ($15.42b): 24.59% • KELYA ($918.33m) 1.09% • BBSI ($441.95m): 3.36%

  21. DCF

  22. DCF

  23. Risk Factors • Worker Compensation reserves • Economic conditions • Reliance on California • Government regulations, esp. ACA • Strong competitors

  24. Trinet (TNET) IPO • Direct competitor, could be valued over $1 billion. • IPO this week?

  25. Recommendation • Initiate long position at 3% • Follow Trinet IPO for market expectations (TNET).

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