BMO upgrades two staffing companies - Hudson Highland, On Assignment

BMO Capital Markets upgraded two U.S.-based staffing companies, On Assignment Inc (ASGN) and Hudson Highland Group (HHGP) to 'Outperform' from 'Market Perform.'

On Assignment, which provides temporary staffing for IT, engineering services as well as physicians and nurses, is expected to post strong earnings, analyst Jeffrey Silber said in a note.

The company had been struggling due to its exposure to healthcare and physician staffing, which was hit hard during the recession.

We believe the company will pass its prior peak earnings quicker than most other staffing providers, owing to the trajectory of its recovery, solid cost management and reduction in non-operating expenses, Silber said.

On Assignment is expected to post earnings on Feb. 18.

Companies that operate in the healthcare space are gaining more confidence as the economy picks up. Hospitals are not intent on cutting costs, and physicians will be the first beneficiaries of this move. Physicians are considered revenue generators in a hospital, hence are the last to be cut and the first to be hired.

Temporary nurses, though, take longer to recover because they are an expense. Most people need to ensure that the service is covered by their insurance providers. The hospitals are reimbursed for the nurses, who get their pay from these institutions.

During weak times, part-time nurses choose to work more hours and full-time employees would like to add more hours to their employment. Particularly in a weak employment situation, nurses who are generally the secondary wage earners become the primary, needing the job. This affects temporary nurses or travel nurses.

IT and engineering staff has been doing particularly well for the past several quarters as more companies invest in ramping up IT projects that were previously delayed due to the recession.

The company also announced a new acquisition in December - an unnamed life sciences firm.

There will likely be more deals to come, given the company's bold goal of approaching $1 billion in revenues over the next five years, Silber said, adding that the company was not being recommended for its acquisition strategy but it could yield additional upside.

Shares of Hudson Highland, a temporary staffing company, has been under pressure this month due to its exposure to Australia.

While the impact is unknown, we believe it will be relatively mild, considering we estimate Queensland represents roughly 10 percent of its Australian revenues, Silber said.

The company had also been severely affected by the recession as temporary staffers are generally the first ones to be cut during recession. But they are also the first ones to be hired as the economy improves.

Hudson Highland did some severe restructuring during the recession.

We believe this process is mostly complete and the company is now better positioned to yield more profits as its business grows, Silber said.

He also expects the company to turn free cash flow positive in 2011, generating about $14.2 million.