Summary

• Starboard Value is a major owner of NSP after a 13D filing yesterday — owning over 13% of the HR company.
• The big news is that a buyout could now be on the table, with Starboard urging NSP to hire a bank to sell itself.
• This comes as NSP has been a notorious underperformer over the last few years.

Seemingly, the guys over at Starboard Value never sleep. They are in the running with ValueAct Capital for one of the most active activist investors over YTD. Their latest endeavor is Insperity Inc. (NYSE:NSP ). Per a 13D filed yesterday, Starboard owns 13.2% of the company. The recent buy puts NSP as high as seventh in Starboard’s pro forma portfolio:

Source: stockpucker Starboard portfolio

In conjunction with the 13D filing, Starboard has also sent a letter to NSP’s board. Here’s the crux of the thesis:

We have conducted an extensive amount of research on Insperity and the industry in which it operates. We believe that Insperity is deeply undervalued and that a number of opportunities exist to create significant value for shareholders based on actions within the control of management.

With these capital allocation and cost improvements, Starboard sees shares reaching $53.84 to $64.80 over the next year. Starboard has a $33.75 to $34.00 a share cost basis. Shares have already spiked nearly 10% on the Starboard news — putting shares up 38% over the last 3-months.

Quick overview of the situation: NSP is one of the largest human resources outsourcing companies in the U.S. offering payroll service and HR-related services. Most investors know ADP (NASDAQ:ADP ) in this space, but with just a billion market cap, NSP is often overlooked.

Part of that is because the company’s stock price has underperformed the S&P 500 by 11 percentage points over the last half decade.

The company does have a 99% retention rate and operates in a stable part of the market. And as Starboard has pointed out, there’s plenty of growth for this industry, where the market is underpenetrated — with just 10% of small and medium businesses in the U.S. using outsourced HR services.

The big issue: It’s worth noting that NSP has managed to underperform the market and its major peers on a stock price basis over the last few years. But in terms of revenue growth, NSP has managed to grow revenues by 41% over the last five years, better than either ADP or Paychex (NASDAQ:PAYX ).

And shares of NSP do appear to be in value territory, trading at 10x forward EV/EBITDA, while a blend of peers, including Trinet Group (NYSE:TNET ), ADP, PAYX, Towers Watson (NASDAQ:TW ) and WageWorks (NYSE:WAGE ) trade at an average multiple of over 16x. NSP also trades at the cheapest EV/FCF and forward EV/sales amongst that group.

But there’s more to the story than just that. Much of the hype is around the fact that Starboard is pushing for a buyout of NSP. The other thing (and more underrated) that Starboard will be pushing for is cost cuts. That’s where we think the big opportunity lies.

NSP’s EBITDA margin is just 2.7%, while the likes of ADP is at 22% and PAYX at 43%. What’s more is that NSP’s return on equity is just 10% (the lowest among its major peers), and below its 5-year median ROE of 12.5% and 10-year median of 15.3%.

So what’s the fix for costs? Part of it is ad spending. It spends a lot on TV advertising and sports events. And the company also spent over 20% of its revenue on general and admin expense over the last twelve months. As we outlined here, Starboard Value’s Letter To Insperity. here’s an example of where Starboard thinks NSP can cut costs:

An example? Two extremely large corporate jets that NSP owns. Starboard estimates the total variable costs and capital costs of maintaining these aircraft to be approximately $10.5 million per year, or more than 15% of LTM EBITDA. At Insperity’s current 8.8x EV / EBITDA multiple, this implies that management could improve the value of the Company by over $92 million, or approximately $3.65 per share, by simply discontinuing the use of these jets and eliminating this seemingly egregious expense. In addition, we estimate that, if sold, the sale proceeds from these jets would exceed $35 million, or an additional $1.38 per share of value .

Other catalysts? Beyond just a buyout and margin improvement, there is an opportunity for share buybacks. NSP carries no debt and has over 20% of its market cap covered by cash on the balance sheet. Its business is not capital intensive and many of its peers carry leverage. Even still, Starboard thinks NSP could buyback 20% of its shares without taking on any debt.

There is some risk with Starboard: The idea of having too many irons in the fire is a big strain on management bandwidth — which is a finite asset. When you get companies doing too many things, that’s generally a bad thing, because management only has so much time, ability to focus, core competencies, etc.

This is also true for hedge funds, and Starboard has a lot going on right now. They are pushing for the Yahoo (NASDAQ:YHOO )-AOL (NYSE:AOL ) merger, as well as the Staples (NASDAQ:SPLS )-Office Depot (NASDAQ:ODP ) merger. Did the big win over at Darden Restaurants (NYSE:DRI ) give Starboard a god complex? Perhaps. This is the fourth activist campaign that Starboard has started within the last quarter.

Where we stand: Starboard’s fair value for NSP is 35% to 63% higher than where shares currently trade. Granted, Starboard could be spreading itself thin of late, some of that risk is alleviated with NSP, where there’s another activist involved.

Stadium Capital also owns over 9% of the company and launched an activist campaign back in March. Together the two own over 20% of the company and they agree that the private jets at NSP have to go. If you have some time to kill, check out Stadium Capital’s 150-plus page presentation on NSP from back in April. located here.

Much of the market is focused on Starboard’s buyout thesis, where the activist has said that a sale would provide for a better risk-adjusted return versus a standalone plan. But I think the rightsizing of its cost structure would go a long way in getting shares higher. Either way, NSP appears to have a number of catalysts for boosting value.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.