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They Know What You Earn, Where You Work, and Sometimes Even How Smart You Are

By Michael Brush
Exclusively for InvestorIdeas.com
August 31, 2006

When signs of housing market weakness surfaced earlier this year homebuilders weren’t the only ones to suffer.

A small, St. Louis-based company that serves as an outside human resources department for a third of the nation’s workforce got hit, as well.

The company, called TALX (TALX), gets about 12% of its revenue from mortgage companies looking for employment and income verification of loan applicants. So as home refinancing and the housing markets cooled, investors worried that TALX business would slow, too.

Then bad news turned worse. In June, news surfaced of a Federal Trade Commission inquiry into whether some acquisitions by TALX might violate antitrust laws.

TALX then drifted lower for much of the summer until Barron’s warned investors to avoid the name altogether in mid-August in part because of the antitrust investigation. That pretty much marked the low for the stock. Since the Barron’s article, TALX shares have leapt 33% to $24 from $18.

In the midst of the comeback, insiders including chief executive William Canfield scooped up more than $560,000 worth of TALX shares for $20.76 to $22.76.

Now, at $24, the stock only has room for about a dollar more of upside, if you believe CIBC World Markets analyst Thatcher Thompson. He suggests that since TALX historically trades for 21.8 times earnings and current estimates call for earnings of about $1.10 in the current year, upside is capped at $25.

But I wouldn’t trust Thompson. Insiders typically don’t buy for just 20% gains, which is about what recent buyers would earn if Thomson is right. Instead, they more often buy too early – but definitely for the long haul and for bigger profits.

Where the gains may come from

The housing market is likely to remain fairly robust -- because economic growth should stay reasonably healthy and interest rates most likely won’t go up much from here. So that probably won’t be a problem.

Next, TALX has powerful critical mass that should help it expand. In one of its major business lines, big companies hand over their payroll data to TALX on a weekly basis so that bankers, potential employers and social workers and the like can contact TALX to verify employment and pay levels. The actual employer doesn’t have to be involved.

TALX is a major player in this space -- with over a third of the country’s workforce in its databases, or 38 million workers from various branches of government and more than 1,500 companies.

Companies who turn verification services over to TALX don’t have to pay. So they save money and avoid legal hassles by handing the job over. The lenders, job screeners and bill collectors who do all the checking up are the ones who foot the bill.

Revenue in this division grew 27% in the most recent quarter – because TALX added more employers and more clients looking to verify employment and pay levels. TALX expects more of the same going forward, and its critical mass should help.

“We plan to grow our database 10% a year,” says finance chief Keith Graves. Each new worker added to the database represents about $2 in annual revenue.

The company also hopes to take on new kinds of outfits looking for employment verification – like payday loan companies – or reach further into other branches of existing clients. It will also soon add university education verification as a service. TALX expects to get price increases of about 3% a year.

Besides employment verification, TALX handles job-related services like mailing out salary forms, managing unemployment insurance claims, consulting on tax issues related to unemployment claims, and managing applications for employment-related tax credits and incentives. The company also does employment-related testing and assessment.

None of this is as exciting as finding a cure for cancer or developing the next iPod. But the block and tackle nature of this business provides a steady base of recurring revenue, and its growth should stay healthy as long as the economy hangs in there.

I think it will, for reasons I’ve gone over in other columns: interest rates still at historic lows, solid employment levels and wage gains, high profit growth and huge amounts of cash on the corporate balance sheet, the strength of foreign economies, the weaker dollar which improves demand for our goods, and simulative government deficits.

The bottom line: I’m cautious going into the seasonally weak period that typically starts around now and lasts through October 15. That weakness could bring better prices for TALX than you can get this week. But long-term investors who agree the economy will hang in there could also buy right here.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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