2023-12-13 17:56:37 ET
Summary
- FTI Consulting, Inc. provides a range of business advisory and consulting services to organizations.
- Despite challenges in the consulting industry, FTI Consulting has continued to grow and improve its earnings results.
- The stock appears fully valued at around $223, although it is worth watching.
- I'm Neutral [Hold] on FTI Consulting, Inc. for the near term.
A Quick Take On FTI Consulting
FTI Consulting, Inc. ( FCN ) provides a range of business advisory, forensic, economic, and technology consulting services to organizations.
The firm has continued to grow despite the consulting industry being challenged by project delays and a reduction in discretionary spending by clients.
While FTI Consulting, Inc. has improved its earnings results, the stock appears fully valued at around $223, so I'm Neutral [Hold] on FCN for the near term.
FTI Consulting Overview And Market
Washington, D.C.-based FTC Consulting was founded in 1982 to provide businesses with various consulting services.
The firm is headed by President & Chief Executive Officer Steve Gunby, who joined the firm in 2014 after a 30-year career at the Boston Consulting Group.
The company's primary offerings include the following:
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Corporate Finance & Restructuring.
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Forensic & Litigation.
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Economic Consulting.
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Technology.
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Strategic Communications.
FTI acquires new clients via its direct sales, marketing, and business development efforts and through referrals.
According to a 2022 market research report by Allied Market Research, the global market for management consulting was estimated at $317 billion in 2021 and is forecasted to reach $811 billion by 2031.
This represents a forecast CAGR (Compound Annual Growth Rate) of 10.2% from 2022 to 2031.
The main drivers for this expected growth are a growing adoption of consulting services to navigate increasingly fast competitive changes in their markets and the risks of operating businesses in online environments.
Also, the chart below shows the expected change in the management consulting services market by service type through 2031:
Major competitive or other industry participants include:
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A.T. Kearney.
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Accenture.
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Aon.
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Bain & Company.
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Booz Allen Hamilton.
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Boston Consulting Group.
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CGI.
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Cognizant Technology Solutions.
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CSC Consulting Services.
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Deloitte.
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Ernst & Young.
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KPMG International.
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McKinsey & Company.
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Mercer.
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PwC.
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Strategyn.
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Sia Partners.
FTI Consulting's Recent Financial Trends
Total revenue by quarter (blue columns) has risen due to improved client spending; Operating income by quarter (red line) has improved markedly after the first half of the year, which was a period of higher employee retention than expected:
Seeking Alpha
Gross profit margin by quarter (green line) has turned higher as a result of better revenue growth against headcount; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have trended lower more recently, helping the bottom line.
Seeking Alpha
Earnings per share (Diluted) have moved up materially as a result of better cost control, which has more recently grown slower than revenue growth.
Seeking Alpha
(All data in the above charts is GAAP).
In the past 12 months, FCN's stock price has risen by 40.37% vs. that of the SPDR S&P Software & Services ETF (XSW)'s gain of 24.68%:
For balance sheet results, the firm ended the quarter with $201.1 million in cash and equivalents and $285.0 million in total debt, none of which was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was $13.1 million, during which capital expenditures were $57.6 million. The company paid $28.3 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For FTI Consulting
Below is a table of relevant capitalization and valuation figures for the company:
Measure (Trailing Twelve Months) | Amount |
Enterprise Value / Sales | 2.4 |
Enterprise Value / EBITDA | 20.4 |
Price / Sales | 2.2 |
Revenue Growth Rate | 13.9% |
Net Income Margin | 7.2% |
EBITDA % | 11.8% |
Market Capitalization | $7,730,000,000 |
Enterprise Value | $8,070,000,000 |
Operating Cash Flow | $70,710,000 |
Earnings Per Share (Fully Diluted) | $6.76 |
Forward EPS Estimate | $8.14 |
Free Cash Flow Per Share | $0.39 |
SA Quant Score | Hold - 3.38 |
(Source - Seeking Alpha).
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:
Based on the DCF, using a discount rate of 11% (10-year Treasury at 5% plus 6% equity risk premium) and forward earnings per share assumption of $8.14, the firm's shares would be valued at approximately $199.32 versus the current price of $222.40, indicating they are potentially currently fully valued.
Commentary On FTI Consulting
In its last earnings call (Source - Seeking Alpha ), covering Q3 2023's results, management's prepared remarks highlighted revenue growth despite a challenging environment for many consulting firms.
The consulting industry has faced difficulties recently due to clients focusing their spending on must-have projects such as cost-takeout work and has been reducing or delaying discretionary work which can be higher-value work to consulting companies.
FTI returned to better earnings results due to better cost structure control after the first half of 2023 saw lower employee attrition than expected and higher inflation.
Analysts questioned the leadership about its various practice areas, international business, and the M&A business.
Management said that its restructuring practice outlook had improved slightly while seeing strong growth potential in its business transformation & strategy engagement prospects.
In its international business, the firm is still in the early stages of that effort, with international earnings still being a drag, and possibly for some time as management is committed to continuing to grow in that respect.
On the M&A advisory front, new merger guidelines from the FTC in the form of enhanced regulatory scrutiny will likely be a net positive for demand for the company's services, but management did not communicate a strong view on how the regulatory environment will affect the number of M&A deals.
For the quarter's results, total revenue rose by 15.1% YoY, and gross profit margin increased by 0.9%.
Selling and G&A expenses as a percentage of revenue grew by 0.3% year-over-year, but operating income was 21.8% higher, reaching $107.7 million for the quarter.
The company's financial position is solid, with ample liquidity versus long-term debt and moderate free cash flow in the trailing twelve-month period.
Looking ahead, full-year 2023 revenue growth is expected to be around 11.9% versus 2022's growth rate of 9.1%, so a slight improvement in that regard.
A potential upside catalyst to the stock could include strength in discretionary engagements in 2024 if the business environment improves.
For now, my discounted cash flow calculation suggests FTI Consulting, Inc. stock may be fully valued at around $223 per share while assuming stronger earnings in 2024, so I'm Neutral [Hold] for FCN in the near term.
For further details see:
FTI Consulting Gets Earnings On Track As Industry Faces Challenges