KFY - Korn Ferry: Struggling Growth Means More Downside Looks Likely (Technical Analysis)

2023-09-12 18:23:51 ET

Summary

• Korn Ferry's shares have seen a significant decline of over 40% in the past 22 months.
• Long-term technical analysis suggests a potential drop in share price to the company's long-term multi-year trend line.
• The company's latest fiscal 2024 Q1 earnings show struggling growth, with a significant decline in gross margin and negative earnings growth.

Intro

We wrote about Korn Ferry ( KFY ) back in July 2021 when shares were trading just under $68 per share. We were bullish on the stock at the time due to strong profitability trends buoyed by robust top-line growth. In fact, Korn Ferry reported record sales ($555 million) in the company's fiscal fourth quarter of 2021 with the RPO & Prof. Search segments really delivering on the bottom line. Furthermore, Korn Ferry was witnessing growth across multiple segments at the time which resulted in analysts projecting 20% top-line growth as well as 50% bottom-line growth for the following year (fiscal 2022).

Suffice it to say, Korn Ferry continued to see gains for a further four months, but once the market sniffed out that fiscal 2023's earnings would be sustainably lower than its predecessor (negative EPS growth), shares finally topped out above $80 a share in November 2021. Since then, shares unfortunately have seen consistent lower highs and lower lows which has resulted in a 40%+ haircut in KFY shares over the past 22 months. The worrying trend here also is that we may be still some distance away from a firm bottom in the stock as we see below.

Long-Term Technical Analysis

If we first go to Korn Ferry's long-term chart, we see that shares earlier this year delivered a long-term technical death cross (the 10-month moving average moved below its corresponding 40-month average counterpart). As we have seen from past long-term cycles in KFY, shares delivered more downside once the crossovers took place which means a drop in the share price to KFY's long-term depicted trend-line below cannot be ruled out at this stage. Furthermore, although the long-term down move has been getting weaker (As depicted by the gradual upward movement of Korn Ferry's histogram), this has not been aligning with higher highs for the stock. Therefore, caution is warranted at this stage.

Intermediate 5-Year Chart

Although descending triangles usually appear as continuation patterns, they also can appear at market tops when they do indeed become reversal patterns. These patterns (lower highs) demonstrate that sellers are in control and usually resolve themselves on the downside. Suffice it to say, the line in the sand for Korn Ferry is the flat horizontal line depicted below. If support were to fail here (given that this support level has held firm for almost 12 months now), we surmise that we would see more movement to the downside before a final multi-year bottom could occur.

Fiscal 2024 Q1 Earnings - Struggling Growth

In the first quarter of this fiscal year which ended at the end of July, Korn Ferry reported $699 million which basically was stagnant growth (despite acquisitions making their mark) compared to the same period of 12 months prior. Sales aside, the worrying trend on the income statement continues to be the company's deteriorating gross margin number. In Q1 -fiscal 2023 (based on roughly the same top-line number), gross margin came in at 27.3% whereas in Q1 of this year, we saw a significant falloff in Korn Ferry's gross margin (19.9%).

Starting from such a low gross profit base in the quarter was bound to adversely affect bottom-line earnings and that is what transpired. Net profit in Q1 dropped to $46.6 million (down from $77.2 million in the prior year's quarter) as operating costs also grew in the quarter. Higher costs and a revenue mix that is not conducive to strong margins continue to result in negative earnings growth for the company. The Prof. Search segment & RPO both saw revenue declines of 21% & 16% respectively in the quarter. These trends are in stark contrast to what we witnessed back in fiscal 2021 when growth in these segments was contributing to robust margin growth (resulting in strong share-price gains) for the company.

Bearish EPS Revisions

Although consensus has given some respite to Korn Ferry's negative EPS revisions over the past 30 days (concerning the bottom-line estimate for fiscal 2024), the underlying trends for both fiscal 2024 & fiscal 2025 continue to look bearish. As we see below, we have a staircase-type bearish decline for both of these years which means share-price declines are the most likely scenario here over the near-term until this trend can turn itself around.

Conclusion

Therefore, to sum up, Korn Ferry's negative growth rates regarding earnings and bearish EPS revisions both point to lower lows in the stock over the near term. The technicals point to a similar trend which is why we recommend long positions should not be scaled into at this present moment in time. We look forward to continued coverage.

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