FTI Consulting - Recession Proof? [FCN]
3/25/2008 10:47:26 AM "There's just as money to be made in the wreck of a civilization as in the up building of one" - Rhett Butler in Gone with the wind.
With the U.S. sub prime crisis erupting into a global credit pandemic, shares of corporate advisory firm FTI Consulting are trending up. FTI, which specializes in offering financial restructuring and bankruptcy advice among other services, is on the radar of many Wall Street firms. The company serves an attractive industry that continues to benefit from the credit meltdown, which has sent several firms into an economic tailspin. In a struggling economy, FTI is experiencing broad-based strength across all its segments, reflected by a 77% increase in its fourth quarter profit. The stock is currently trading at $71.65, about 29 times its 2008 estimates.
Profile - FTI Consulting is a global consulting firm -- offering expert advice in the areas of compliance, risk, reputation, liability, performance, finance and information. The company provides consulting services in areas including fraud, damages, valuation, anti-trust and anti-competition, malpractice of accounts, contract disputes, patent infringement, price fixing, purchase price disputes, bankruptcy, disclosure statements, trademark and copyright infringement, and the financial impact of government regulations.
Positive catalysts
1. Presence in a hot sector
The spillover from the subprime carnage into the broader markets has paved the way for restructuring and bankruptcy businesses to flourish. According to analyst firm SunTrust Robinson Humphrey, bankruptcy filings in Delaware and the Southern District of New York, two main venues that house large corporations, increased 543% in January and more than 3,000% through the beginning of February. Analysts expect the demand for bankruptcy and restructuring services to increase at least through 2008, amid the weakening macro economic climate. FTI Consulting, which enjoys a large bankruptcy and restructuring practice, is well positioned to benefit from the demand. Analysts also foresee a huge demand for criminal and civil litigation consultants, in view of current and future investigations related to the credit crisis. FTI, which offers forensic accounting and litigation support services, is poised to take advantage of the demand backdrop.
2. Diverse revenue base
The company generates revenues through operations in five segments - forensic and litigation consulting, corporate finance/restructuring, economic consulting, technology and strategic communications. No single client accounted for more than 10% of its total revenues in 2007, according to the company's regulatory filings. FTI says its broad service offerings and diversity of revenue streams help it manage market-related fluctuations in any of its segments.
Revenue contributions from segments
| FY07 | FY06 | FY05 | |
|---|---|---|---|
| Forensic and Litigation Consulting | 21.7% | 27.3% | 29.2% |
| Corporate Finance/Restructuring | 26.1% | 30% | 39.1% |
| Economic Consulting | 17.4% | 20.4% | 20.1% |
| Technology | 16.3% | 16.6% | 11.7% |
| Strategic Communications | 18.5% | 5.75% | ---- |
3. Accelerating revenue growth
The company's revenues grew 41.4% in 2007, compared to 31.2% growth in 2006, 26.4% in 2005, and 13.7% in 2004. FTI's revenue for 2007 topped a billion dollars, two years ahead of its plan to reach $1 billion in revenues by 2009.
4. Increase in revenue generating professionals
Being a consultant firm, the company's financial results are mainly driven by the number of revenue generating professionals it employs and the optimal utilization rates of the billable professionals and their average billable rate per hour. The number of revenue generating professionals increased to 1,954 in 2007 from 1,596 in 2006 and 1,005 in 2005.
4-a. Revenue generating professionals
| FY07 | FY06 | FY05 | |
|---|---|---|---|
| Forensic and Litigation Consulting | 430 | 388 | 330 |
| Corporate Finance/Restructuring | 406 | 322 | 336 |
| Economic Consulting | 236 | 206 | 184 |
| Technology | 344 | 256 | 155 |
| Strategic Communications | 538 | 424 | ---- |
| Total revenue-generating professionals | 1,954 | 1,596 | 1,005 |
4-b. Utilization rates of billable professionals
The utilization rates of billable professionals has declined to 75% in 2007 from 78% in 2006 for the company's Forensic and Litigation Consulting segment, while increasing to 80% from 77% for the Corporate Finance/Restructuring segment, and increasing to 85% from 80% for the Economic Consulting segment.
| Utilization rates of billable professionals | FY07 | FY06 | FY05 |
|---|---|---|---|
| Forensic and Litigation Consulting | 75% | 78% | 76% |
| Corporate Finance/Restructuring | 80% | 77% | 82% |
| Economic Consulting | 85% | 80% | 82% |
4-c. Average billable rate per hour
The average billable rate per hour has increased for all the three segments in the last three years.
| Average billable rate per hour | FY07 | FY06 | FY05 |
|---|---|---|---|
| Forensic and Litigation Consulting | $321 | $305 | $284 |
| Corporate Finance/Restructuring | $409 | $400 | $396 |
| Economic Consulting | $412 | $386 | $368 |
* The company has not presented utilization and billable rates for its technology and strategic communications segments, as most of the revenues of these segments are not generated on an hourly basis.
Employee turnover for 2007 was 15.8%, a decline from an annualized rate of about 18% in 2004. None of the company's employees are subject to collective bargaining contracts or represented by a union.
5. Earnings upside surprise
FTI has consistently outperformed consensus estimates in the last four quarters.
| Q1-07 | Q2-07 | Q3-07 | Q4-07 | |
|---|---|---|---|---|
| Earnings upside surprise | 2.9% | 20.5% | 4.2% | 3.4% |
For 2008, the company expects to report earnings of $2.40-$2.50 per share, on revenues of $1.275-$1.315 billion. Analysts are looking for earnings of $2.46 per share on revenues of $1.28 billion for the full year. In the last 30 days, analysts have revised up full year earnings estimates by 12 cents to $2.46 per share, from $2.34, earlier.
6. Q1 Growth estimates higher than Industry/sector
Analysts expect FTI's bottom line to grow 27.8% in the first quarter, compared to growth projections of about 13% for the industry, and 8.1% for the sector.
7. Fast paced International expansion
The company operates in 16 countries in addition to the U.S., mainly due to its acquisitions in 2006 and 2007. FTI has been quickly expanding its global footprint with offices in the U.K., Ireland, Australia, France, Russia, China including Hong Kong, the United Arab Emirates, South Africa, Japan, Singapore, Argentina and Brazil. For 2007, the company generated 16% of its revenues from outside the U.S. In the year-to-date period, the company has announced six acquisitions, but has not divulged the financial terms of the deals.
- Mid-March, FTI said it acquired European consulting firms Brewer Consulting and Blueprint Partners, for an undisclosed sum. Brewer Consulting, which has its primary operations in the U.K and U.A.E., provides dispute resolution and procurement management services to construction, engineering, transportation and oil & gas industries. Brussels-based Blueprint helps its clients navigate the complex EU regulatory process as well as advises on their pan- European corporate communications strategies.
- At February-end, FTI acquired TSC Brazil, a computer forensic and IT security consultant in the Brazilian and greater South American marketplace, but did not divulge the terms of the deal.
- Mid-February, the company acquired Hong Kong-based Thompson Market Services, which offers intellectual property and brand protection solutions in about 20 cities in China.
- Feb 12, FTI acquired Strategic Discovery, which serves the litigation discovery industry. Same day, the company also acquired Rubino & McGeehin Consulting Group or RMCG - a consulting firm with a primary emphasis in the construction and government contracts sectors.
With better-than-expected International growth, the company said in its fourth quarter conference call that it achieved its five-year revenue target, two years ahead of schedule. FTI's revenue for 2007 topped a billion dollars, with 16% of the revenues generated from outside the U.S., well ahead of the company's plan to generate $1 billion revenue by 2009 and to originate 15% of this revenue from outside the U.S.
8. Industry leading margins
The company's gross and operating margins for the trailing twelve months are higher than that of rivals -- Huron Consulting Group Inc. (HURN) and Navigant Consulting Inc. (NCI) - and also above industry levels. FTI's gross margin of 45.23% for the trailing twelve months is higher than Huron's 38.53%, NCI's 33.92% and the Industry's 38.53%. FTI's operating margin for the trailing twelve months is 18.68%, above Huron's 15.28%, NCI's 11.1% and the Industry's 9.45%.
9. Prestigious and High institutional ownership
Institutional investors own about 100% of the company's outstanding float. FMR LLC, the parent of Fidelity Investments, owns 8.62% stake in FTI, Bank of America 3.86%, Barclays Global Investors UK Holdings 3.19% and Wells Fargo owns 2.91%. (* See notes below)
Risks
1. Low Insider ownership
Insiders have sold about 0.76% of outstanding shares between Nov 27, 2007 and January 28 and as of Dec 31,2007, company insiders owned just 0.34% of total outstanding shares.
2. Customer concentration in technology segment
The company's technology revenues rose to $162.84 million in 2007, from $117.23 million in 2006 and $62.86 million in 2005. Technology revenues comprised 11.7% of total revenues in 2005, 16.6% in 2006 and 16.3% in 2007. A single client accounted for about 23% of the company's technology revenues in 2007. Loss of this client may impact technology revenues significantly.
3. Turnover Susceptibility
As of December 31, 2007, the company had written employment agreements with 105 of its 180 senior managing directors or SMDs. These contracts expire between 2008 and 2018, with 45 expiring in 2011 and 31 expiring in 2012. FTI may still experience a high turnover and incur higher costs for retaining talent, considering the high competition and low entry barriers for its business. It is still vulnerable to its professionals wanting to start their own firms or to change employers.
Stock movement
After trading in a range for about 1 1/2 years, shares of FCN broke out to an all time high in Feb 2007 on increased volume. Since then the stock has been on a steady up trend and has gained more than 150% and continues to set new highs. However, the stock has risen considerably in the past 6 weeks and is susceptible to some profit taking/pull back on overall market weakness. Should the stock pull back, it has good support around the $63 level. The RSI is also near overbought levels.
Conclusion
The company's presence in a hot sector that tends to boom amid the weakening U.S. economy, diverse revenue base, accelerating revenue growth, and fast-paced international expansion are perceived as upside drivers for the stock. However, the company's vulnerability to employee turnover, in view of intense competition and low entry barriers for the business, induce an element of uncertainty.
Notes (*)
Institutional ownership is the percentage of a firm's outstanding shares held by mutual funds, pension plans, and other institutional buyers. Insider ownership represents the percentage of shares outstanding held by top management, directors, and anyone else holding at least 5% of the total shares issued. So if a large buyer holds more than 5%, then the buyer's shares would be counted in both the institutional and insiders' holdings. In such cases, the sum of Institutional ownership and Insider ownership of the company could exceed 100%.
