M c I n t i r e I n v e s t m e n t I n s t i t u t e 1

MCINTIRE INVESTMENT INSTITUTEAT THE UNIVERSITY OF VIRGINIA

Adam, Naveed, Spencer| March 25, 2014

Barrett Business Solutions, INC

Ticker Symbol: BBSI

M c I n t i r e I n v e s t m e n t I n s t i t u t e

STOCK OVERVIEW

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Market Cap: $441.23 MillionP/E: 25.42xIndustry P/E: 38.14xEPS: 2.42Dividend Yield: 1.20%

Current Price: $61.51Beta: 1.25P/S: .83xP/B: 6.07x

M c I n t i r e I n v e s t m e n t I n s t i t u t e

BUSINESS OVERVIEW

• Founded in 1951• IPO in 1993• Headquartered in Vancouver, WA• 50 offices in 12 states• Focus on California and Pacific

Northwest

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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 2013.4

M c I n t i r e I n v e s t m e n t I n s t i t u t e

BUSINESS OVERVIEW

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

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

BUSINESS OVERVIEW

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

THESIS POINTS

• Increased regulation causes a growth in demand

• Structured to work better with small companies

• Clean Financials to support growth plan

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

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).

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

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.

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

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.

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

STRATEGIC ADVANTAGE

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Tactical Alignment

Dynamic Relationship

Strategic Counsel

M c I n t i r e I n v e s t m e n t I n s t i t u t e

STRATEGIC ADVANTAGE

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Loyalty• Employee Retention

• Ex: P&G• Client Retention

Productivity• “We find strong

evidence that where employees have the right of control over assets and right to some of the residual profit establishment financial performance is enhanced.” Rutgers University

Semi-Skilled Labor• High demand• Not easily

outsourced

M c I n t i r e I n v e s t m e n t I n s t i t u t e

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

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

GROWTH AND FINANCIALS

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

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

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

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

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

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

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

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

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

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)19

M c I n t i r e I n v e s t m e n t I n s t i t u t e

MARGINS

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

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

DCF

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Current Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10Optimistic Rate 25% 23% 21% 18% 15% 12% 10% 8% 6% 5%

Optimistic: Growth Rate Revenue 532.844 666.055 819.2477 991.2897 1169.722 1345.18 1506.602 1657.262 1789.843 1897.233 1992.095Realistic Rate 22% 19% 15% 13% 12% 10% 8% 6% 5% 4%

Realistic: Growth Rate Revenue 532.844 650.0697 773.5829 889.6204 1005.271 1125.904 1238.494 1337.573 1417.828 1488.719 1548.268

Operating Costs Margin 16.24% 16.24% 16.24% 16.24% 16.24% 16.24% 16.24% 16.24% 16.24% 16.24% 16.24%

Optimistic Operating Costs 446.32 557.8877 686.2018 830.3042 979.759 1126.723 1261.93 1388.123 1499.172 1589.123 1668.579

Realistic Operating Costs 446.32 544.4984 647.9531 745.146 842.015 943.0568 1037.362 1120.351 1187.573 1246.951 1296.829

Optimistic Operating Profit 86.524 108.1673 133.0458 160.9854 189.9628 218.4572 244.6721 269.1393 290.6705 308.1107 323.5162

Realistic Operating Profit 86.524 105.5713 125.6299 144.4743 163.256 182.8467 201.1314 217.2219 230.2552 241.768 251.4387

Optimistic Taxes 24.39977 30.50319 37.51892 45.39789 53.56952 61.60494 68.99754 75.89729 81.96907 86.88722 91.23158

Real Taxes 24.39977 29.77111 35.42762 40.74177 46.0382 51.56278 56.71906 61.25658 64.93198 68.17857 70.90572

Optimistic After Tax Profit 62.12423 77.66414 95.5269 115.5875 136.3933 156.8523 175.6746 193.242 208.7014 221.2235 232.2847

Realistic After Tax Profit 62.12423 75.8002 90.20224 103.7326 117.2178 131.284 144.4123 155.9653 165.3233 173.5894 180.533

Net Investment (% of Revenue) 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39%

Optimistic Net Investment 2.06 2.597615 3.195066 3.86603 4.561915 5.246202 5.875747 6.463321 6.980387 7.39921 7.769171

Realistic Net Investment 2.06 2.535272 3.016973 3.469519 3.920557 4.391024 4.830126 5.216536 5.529528 5.806005 6.038245

Optimistic Working Capital 64.421 80.52625 99.04729 119.8472 141.4197 162.6327 182.1486 200.3635 216.3925 229.3761 240.8449

Change in Optimistic Working Capital 16.10525 18.52104 20.79993 21.5725 21.21296 19.51592 18.21486 16.02908 12.98355 11.4688

Realistic Working Capital 64.421 78.59362 93.52641 107.5554 121.5376 136.1221 149.7343 161.713 171.4158 179.9866 187.1861

Change in Realistic Working Capital 14.17262 14.93279 14.02896 13.9822 14.58451 13.61221 11.97874 9.702782 8.57079 7.199464

Optimistic Free Cash Flow 60.06423 58.96128 73.81079 90.92159 110.2589 130.3931 150.2829 168.5639 185.6919 200.8407 213.0467

Realistic Free Cash Flow 60.06423 59.09231 72.25248 86.2341 99.31506 112.3084 125.97 138.7701 150.0909 159.2126 167.2953

M c I n t i r e I n v e s t m e n t I n s t i t u t e

DCF

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Cost of Debt 0.0311

Cost of Equity 0.13

WACC 0.1282 1.1282

Optimistic Terminal Value 1750.803

Realistic Terminal Value 2246.292

Optimistic EV 660.6313

Realistic EV 573.6977

Optimistic Fair Value 655.5783

Realistic Fair Value 568.6447

Shares Outstanding 7.165

Optimistic Share Value $91.50 Realistic Share Value $79.36

M c I n t i r e I n v e s t m e n t I n s t i t u t e

RISK FACTORS

1. Worker Compensation reserves2. Economic conditions3. Reliance on California4. Government regulations, esp. ACA5. Strong competitors

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

TRINET (TNET) IPO

• Direct competitor, could be valued over $1 billion.

• IPO this week?

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

RECOMMENDATION

• Initiate long position at 3%• Follow Trinet IPO for market

expectations (TNET).

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