Last week, we debated the merits of recruitment companies on high share price ratings (click here). One of the key concerns was that the market had priced in a stronger jobs market without any evidence of this trend. Therefore the premium-valued recruiters were liable to fall sharply if they didn't meet market forecasts. This is exactly what's happened today as Michael Page International (MPI) slumps by nearly 7% to 370.5p on a weak trading update.

Michael Page is the biggest UK-quoted recruiter by market value, worth £1.1 billion. It has reported a 6.7% drop in first quarter profit (year-on-year). Declines were recorded in both permanent and temporary job placements. It now warns that the second quarter will be 'challenging'.

We recently explored the world of highly-rated stocks in Shares (click here) and concluded that Michael Page was one to avoid based on its unjustified valuation. Today's market reaction is therefore no surprise to us.

Investec reiterates its 'sell' rating on the stock, saying: '(The market is) Pricing in a recovery that isn't coming.... in the short term.' It dislikes the group's high exposure to the permanent jobs market.

Talk to any recruiter and they will tell you that corporates increasingly want flexibility when hiring new staff. While there is growing optimism about major economies, corporates don't want to take the risk of hiring permanent staff and then having to incur large redundancy costs should there be any economic setback that hurts their business. This is why temporary – or 'contract' as called by many recruiters – job placements are in vogue.

Yet even temporary isn't the magic answer to recruiters, as Michael Page shows in its latest results. Its temporary job placement gross profit has started to decline, having shown growth in each quarter last year.

Cantor Fitzgerald is another 'seller' of the stock with a 320p price target. It also believes that the large permanent exposure will hold Michael Page back in any staffing markets recovery, as will a high exposure to the Eurozone markets.

MPI - Comparison Line Chart (Rebased to first)


'A first quarter update does little to dispel our fears that trading remains tough in recruitment markets, and that there is little sign either of market stability or in a return to growth,' says stockbroker Panmure Gordon. It adds: 'With some optimism elsewhere that conditions were over the worst, this is likely to be taken badly across most recruitment shares as well as those of Michael Page.'

The stockbroker is correct as the peer group have been dragged down today. Hays (HAS) is off 2.3% at 96.95p; and SThree (STHR) is down 1% to 344.5p. Robert Walters (RWA) is flat at 226p.

Issue Date: 16 Apr 2013