KFRC

I anchor the cycle view in three facts. First, the company's mix is where you want to be late-cycle: longer assignment durations (H10 months), high average bill rates (H$90/hr), and a client base focused on Fortune-class enterprises. The investor deck reiterates that project-solutions work carries higher bill rates and gross margin than traditional staff augmentation, and Kforce is leaning into that mix shift. Trailing-twelve-month EBITDA sits around $81m, with net borrowings near $67.5m (~0.8x levered), leaving ample balance-sheet flexibility.

Second, the company is already showing the first derivative improvements you typically see before topline y/y turnssequential growth in both Tech and FA and an 80 bps q/q improvement in flex GP%.

Third, industry context is not hostile: Kforce's June 10-Q cites SIA's March 2025 estimate for low-single-digit growth in U.S. tech temp staffing in 2025, acknowledging uncertainty but pointing to stabilization rather than fresh deterioration. The mix of comments in MD&A is consistent with "demand-constrained but steady," not a renewed downswing.

Financially, Kforce exited 2024 at $1.41bn of revenue and $2.68 of EPS, after absorbing a tough year of macro caution in digital projects; Q4'24 revenue was $343.8m and grew slightly sequentially on a billing-day basis. The 2023 10-K shows how the prior slowdown compressed gross margin (27.9% in 2023 from 29.3% in 2022) and why operating margins retrenched from peak 2022 levels; it also records how management flexed SG&A down and kept cash flow healthy even as direct-hire fell. That "muscle memory" matters now: they have levers to pull, spreads held up, and the model throws off cash when receivables stop rising.

On liquidity and capital returns, the firm had $70m drawn on its $200m revolver at 6/30/25 (vs. $32.7m at year-end), $2.5m of cash, and remained in covenant compliance. They repurchased ~655k shares in 1H'25 for ~$31.7m, with ~$31.8m still authorized at mid-year, and paid a $0.39 dividend in Q2 and again for Q3. For 1H'25, operating cash flow was $18.6m, capex $8.3m (elevated by Workday/cloud implementation), and free cash flow ~$10.3m; with receivables stabilization in a trough, cash conversion typically improves from here. The revolver matures in Oct-2026inside our 12-month window they'll likely start to address extension; given sub-1x leverage and a vanilla banking group, refinancing risk looks modest and manageable.

To avoid relying on headlines or sentiment, I rebuild a 12-month model bottom-up from the run-rate and guidance. I take the company's Q3 midpoint ($328m revenue, EPS about $0.57) at face value, then assume Q4 is essentially flat to slightly up sequentially (seasonally a touch better than Q3, but still soft), Q1 seasonally dips, and Q2 recovers modestly as paused projects restart and solutions mix creeps up. Concretely, I model the next four quarters (Q4'25 to Q3'26) at $340m, $333m, $345m, and $350m of revenue, respectively$1.368bn in aggregate versus the $1.41bn delivered in 2024.

I hold consolidated gross margin at 27.2% (Q2 was 27.1%; guidance for Q3 is 27.027.2%), SG&A at 22.3% of revenue (Q2 was 22.2%, Q3 guide 22.422.6%), and D&A at ~0.4% of revenue (consistent with recent run-rate). That yields an operating margin of ~4.5% and EBIT of ~$62m for the next twelve months. I assume ~$3.8m of interest expense (consistent with 1H'25 and $67.5m of net borrowings), a 22% tax rate (Q3 guide is 21%), and ~18.4m diluted shares on average (Q2 WASO 17.8m; actual shares outstanding were ~18.6m in late July, and the firm is repurchasing). That math produces forward twelve-month EPS around $2.45$2.55 and free cash flow that comfortably covers the $1.56 annual dividend while still allowing opportunistic buybacks.

The scenario tree is not heroic in either direction. In a bear case where enterprise tech budgets remain stuck and the modest Q2 sequential bump proves transitory, I haircut revenue to ~$1.32bn for the next twelve months, hold gross margin at 27.0%, let SG&A drift to 22.8% given less volume leverage, and nudge D&A to 0.45%. EBIT falls to ~$4950m, EPS lands around $1.90$2.00, and I value it at 8x EV/EBIT (near recessionary staffing troughs), yielding an equity value near $18 per shareroughly where the chart says "real capitulation" would live.

In a bull case where backlog converts and solutions mix expands, I take revenue to ~$1.40bn, gross margin to 27.5% and SG&A to 22.0%, producing ~5.1% operating margin, ~$7172m of EBIT and ~$2.80$2.90 of EPS; 11.5x EV/EBIT on that delivers ~$41. The base case is the midpoint: $1.37bn of revenue, ~4.5% OPM, ~$62m of EBIT, ~$2.50 EPS and 1011x EV/EBIT implying ~$3234. The implied P/E on the base EPS at today's ~$27.8 is ~11x, which is undemanding for a delevered, dividend-paying IT staffing name at what looks like the trough.

The appeal here is how the downside and upside are both legible in the operating statement. The industry playbook says staffing companies exit troughs with improving spreads, then SG&A leverage as volumes return; technology-heavy firms with longer assignments tend to have milder amplitude on the way down and more persistent improvement on the way up. Moreover, client budgets are not turned off; they're re-sequenced. Kforce's own long-term commentary and data show a sizable backlog of "strategically imperative" technology initiatives, a solutions mix at higher margins than pure staff aug, and a robust Fortune-weighted book that generally turns earlier than smaller-enterprise demand.

To keep the analysis grounded, I calibrate those assumptions against recent history. In 2022near the last peakKforce's quarterly operating margin guide was 7.07.4%, with gross margin near 29.5% and SG&A near 22%. That is the upper bound of what's feasible in the next twelve months absent a sharp re-acceleration in enterprise tech demand. In 2023, as demand softened, gross margin compressed to 27.9% and flex GP% fell to 26.0%, with EPS slipping to $3.13; 2024 carried that normalization forward to $1.41bn of revenue and $2.68 of EPS. The base model above sits between those bookends and aligns with the company's current guide for gross margin, SG&A and operating margin.

Valuation context in the peer set is helpful but not determinative. The large global generalists (ManpowerGroup, Robert Half) trade in a wide range depending on where the cycle sits and how much "consulting/solutions" they carry alongside temp staffing; similarly, ASGN and Korn Ferry as more solutions-heavy comparables tend to command higher through-cycle multiples than pure staff aug. LSEG/Reuters snapshots today show mid-teens P/E multiples for Korn Ferry and ASGN on trailing figures, and EV/EBITDA ranges from mid-single to low-double digits across the group, consistent with using ~8x trough and ~1112x recovery EV/EBIT for Kforce. I don't need comp precision for the call, only the order of magnitude; the spread between trough and mid-cycle multiples is wide enough to matter, and Kforce is toward the low end of that range today.

Balance sheet and capital allocation are incremental positives. As of June 30, 2025, $70m was drawn on the revolver against $200m capacity, leaving $129m of availability after letters of credit; leverage is below 1x on TTM EBITDA, and the company has been a steady buyer of its own stock and a consistent dividend payer since 2014. In Q2'25 alone, $17.4m was returned via buybacks and dividends; the Q3 dividend remained at $0.39. If volumes drift sideways another quarter or two, Kforce can keep supporting the dividend and nibbling on the float while waiting for the turn; if volumes improve, the operating leverage plus buybacks can produce a fast EPS response. The main calendar item to watch is 2026 revolver maturity, which I expect they will address well ahead of time.

This is a cycle stock, so entry price matters. The shares closed recently around $27.8, versus a 52-week high near $62.8 and an all-time peak around $81 in late 2021; the current dividend annualizes at $1.56, implying a yield of roughly 5.6%. With net debt of about $67.5m and an equity value near $515520m at today's price, the enterprise value sits around $585590m, or a bit over 7x the company-reported TTM EBITDA of ~$81ma reasonable place to underwrite a trough-to-base recovery.

There are real risks. The obvious one is a longer-lasting demand constraint for enterprise application modernization, data and cloud programs. If the "backlog" lingers because CFOs remain unwilling to release budgets, the sequential improvements we saw in Q2 could stall, and Q3's client-specific roll-offs could reappear in Q4. The FA segment has already been under pressure for multiple years and is too small to offset Tech if Tech wobbles again.

A second risk is structural competitive intensity through vendor-management systems and large MSPs compressing bill-pay spreads; the firm claims stability here, and Q2 showed an 80 bps sequential uptick in flex GP%but it bears monitoring. A third is execution on solutions: higher-margin project work needs more front-end investment and carries delivery risk; mis-scoping a few meaningful projects can dent margin. Finally, while refinancing risk looks low, a less friendly credit backdrop in 2026 could nudge interest expense higher if they maintain a drawn balance.

What would change my mind. Three things would push me off the long: a clear deterioration in spreads or DSO that signals pricing power erosion rather than normal late-cycle variability; a second straight negative sequential print in Tech revenue absent billing-day effects; or a capital-allocation turn away from buybacks/dividends to plug unforeseen cash burn. Conversely, if the November 3 print confirms Q3 at the midpoint and management frames Q4 as stabilizing with modest sequential improvement while maintaining GP% and SG&A discipline, the stock should rerate toward my base case. The date is set and near-termKforce has scheduled Q3 results for after market on November 3 with a 5pm ET call.

A final note on cycle mechanics. In staffing, the inflection rarely arrives with fireworks. What you normally seethis is straight out of the staffing playbookis that units stop falling first, then gross margin stabilizes or inches up as the mix improves, and only afterwards do SG&A ratios fall as you get operating leverage back. The sector framework I use emphasizes this sequence and cautions against paying up for the turn until those first two steps are visible; Kforce's last two quarters and its posted KPI deck check those boxes.