What a brutal six months it’s been for Insperity. The stock has dropped 37.2% and now trades at $37.71, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Insperity, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Do We Think Insperity Will Underperform?
Despite the more favorable entry price, we're swiping left on Insperity for now. Here are three reasons you should be careful with NSP and a stock we'd rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within business services, a stretched historical view may miss recent innovations or disruptive industry trends. Insperity’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 2.8% over the last two years was well below its five-year trend. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Insperity, its EPS declined by 18.7% annually over the last five years while its revenue grew by 9.4%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Insperity’s margin dropped by 4.3 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the longer-term trend returns, it could signal it’s in the middle of an investment cycle. Insperity’s free cash flow margin for the trailing 12 months was breakeven.
Final Judgment
Insperity falls short of our quality standards. After the recent drawdown, the stock trades at 20.4× forward P/E (or $37.71 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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