Investor’s Business Daily - Thursday, February 5, 1998
"For People Who Choose to Succeed"

The New America - Administaff Inc./ Kingwood, Texas
New Deal Boosts Personnel Firm’s Prospects

By Ira Breskin

Small companies often need help handing nettlesome personnel matters. Administaff Inc. is eager to lend a hand.
The personnel-management company handles payroll, taxes, benefits, government compliance, hiring and other employee-related matters. Its services touch almost 30,000 employees at more than 1,900 client firms.

"We become the human resources department for small to midsize companies," explained Administaff President CEO Paul Sarvadi.

Administaff won a strong endorsement last week when it signed a marketing deal with American Express Corp.

Under the agreement, the credit card issuer will promote Administaff’s services to its 1.6 million small-business clients and card holders. In exchange, American Express will receive a monthly fee for each client found through its referral.

"The real core of the deal is that it increases marketing efficiency," Sarvadi said. "We will harvest business from the entire spectrum of AmEx customers."

American Express also bought a 5% stake in Administaff for $17.7 million and has warrants to buy an additional 15% over the next three to seven years. Administaff management currently holds about 50% of its stock.

It’s still uncertain just how big an impact the deal will have on Administaff. But some analysts project the company’s earnings will reach $9 to $11 a share by 2004. That’s up from 34 cents a share in ’96 and an estimated 57 cents in ’97, according to First Call.

For now, the deal bodes well for the future of the burgeoning personnel-management industry, says analyst Richard Wayman of The Ohio Co.

The industry has grown upwards of 30% annually to $18 billion over the last six years, says trade group National Association of Professional Employer Organizations.

But there is vast room for further growth. Personnel-management companies like Administaff handled less than 2% of the $1.3 trillion in wage and benefit costs last year for workers at small and midsize businesses.

Administaff plans to grab a larger share of the market by building a nationwide network of offices. It’s looking to open at least four sites each year for the next several years. Generally, two offices will be used as beachheads in new cities. The others will handle incremental business in areas where Administaff already operates.

The company’s long-term goal is to have as many as 90 locations in 40 cities. It now has 19 sites in 12 metropolitan areas. Two markets – Houston and Dallas – accounted for slightly more than half of total revenue in ’97, down from about 80% in ’96.

For the third quarter, Administaff’s operating earnings rose 5% to 21 cents a share from a year earlier. Revenue jumped 31% to $302.6 million. At Sept. 30, the company had no debt and about $53 million in cash.

Administaff recruits workers, oversees payroll and collects related taxes for small firms with an average of 16 employees.

It also arranges for mandatory benefits, such as workers’ compensation and unemployment insurance, as well as optional benefits like health insurance and retirement savings programs for an average of 27,600 workers per month. That’s 18.3% more than in ’96.

Personnel-management companies allow small-business owners to focus on their core operations. What’s more, because personnel-management firms cover a large number of workers, they typically can offer more comprehensive benefits than small-business owners can on their own.

"They provide small business with a level of human resource service generally available only to large corporations," said analyst Ty Govatos of Donaldson, Lufkin & Jenrette Securities Corp.

Companies like Administaff absorb a customer’s staff and then lease it back at a slight premium. The charge includes the personnel-management fee, employee salaries and benefits.

Administaff’s average service charge is 3%, compared to 1.2% for the personnel-management industry, estimates analyst Mark Allen of Robinson-Humphrey & Co. The company’s higher fee reflects the larger number of services it offers.

Administaff targets companies with higher-paid, mostly white-collar employees.

The reason? This wage-earning group generally remains more stable throughout economic cycles. Moreover, white-collar workers tend to file fewer disability claims than blue-collar counterparts, analysts say. This cuts Administaff’s exposure to insurance risk.

Administaff can earn money beyond its service fee by cutting a customer’s health insurance and workers’ compensation insurance costs. It gets to keep the difference between what the employer now pays and what he used to pay.

The stock trades as ASF at about 42.

Reprinted with permission of Investor's Business Daily.