Kelly Services Balances Growth and Growing Pains in a Volatile Market

The recent earnings report from Kelly Services painted a picture of a company navigating both triumph and turbulence. While its Q1 2025 revenue surged 11.5% year-over-year to $1.16 billion—beating analyst expectations—the company’s adjusted EPS fell 30.4%, underscoring a critical tension between top-line ambition and bottom-line execution. Investors, however, seemed to focus on the revenue upside, sending shares up 6.28% in pre-market trading. The question now is: Can Kelly sustain this growth while addressing margin pressures, or is it a fleeting victory in a choppy labor market?

Revenue Growth Masks Segment Fractures

Kelly’s headline revenue beat was driven by the acquisition of Motion Recruitment Partners (MRP), which contributed $119.8 million. But organic growth—a better gauge of underlying strength—was a meager 0.2%, hampered by an 0.8% decline in U.S. federal government contracting revenue. Meanwhile, the Education and Science, Engineering & Technology (SET) segments stood out. Education revenue rose 6.6%, fueled by strong fill rates and new clients, while SET revenue soared 39.2%, benefiting from demand for higher-margin outcome-based solutions in semiconductors and renewables.

Margins Under Pressure, But Hope for a Turnaround

Despite the revenue wins, profitability took a hit. Adjusted EBITDA margins dipped to 3.0%, down 20 basis points from last year, as cost pressures in SET and integration expenses from MRP weighed on results. CFO Troy Anderson acknowledged the near-term pain but emphasized a path to recovery: “We expect margin improvement in the second half of the year through operational efficiencies and pricing discipline,” he stated on the earnings call.

The stock’s pre-market surge suggests investors are betting on this narrative. Yet, the company’s shares have fallen 50.68% over the past year, trading at a price-to-book ratio of just 0.34x—a historically low valuation that some argue reflects undervaluation.

The Elephant in the Room: Federal Contracts and Macroeconomic Risks

Kelly’s reliance on federal government contracts remains a vulnerability. With that segment’s revenue declining, the company’s ability to diversify revenue streams will be critical. CEO Peter Quigley highlighted focus on “specialty sectors,” like education and renewables, as growth engines. However, macroeconomic headwinds—particularly in semiconductors and renewables—could disrupt these plans.

Analysts are cautiously optimistic. The consensus 2025 EPS forecast of $2.42 assumes margin recovery, but it hinges on Kelly’s execution. The company’s 15-year streak of dividend payments—albeit modest at $0.075 per share—adds stability for income-focused investors.

Conclusion: A Stock for the Long Game?

Kelly Services’ Q1 results are a microcosm of its broader challenges: structural growth in high-margin segments contrasts with margin erosion and sector dependency. While the revenue beat and strategic moves like the MRP acquisition offer hope, investors must weigh near-term risks against long-term potential.

The data is clear: the Education and SET segments—growing at 6.6% and 39.2%, respectively—are engines of resilience. If Kelly can stabilize margins in SET and reduce reliance on volatile federal contracts, its valuation could rebound. With a price-to-book ratio well below historical averages and a dividend-paying record, the stock may appeal to those willing to bet on its turnaround.

Yet, the path is fraught. A 20–30 bps margin decline in Q2 looms, and macroeconomic uncertainty could test its semiconductor and renewables bets. For now, the market has chosen to look past the EPS miss—a sign that Kelly’s story remains unfinished but not unworthy of consideration.

In an era where labor markets are as fickle as the stock market, Kelly’s performance underscores a truth: growth alone isn’t enough. The proof will be in the margins.