We are downgrading our long-term recommendation on Baltimore, Maryland-based FTI Consulting Inc. (FCN) from Outperform to Neutral based on negative factors, including lackluster performance of the Corporate Finance and Restructuring segments despite a turnaround, and weak client spending owing to increased uncertainty surrounding the current market environment, particularly in Europe.
FTI Consulting’s fourth quarter 2011 adjusted earnings of 70 cents per share surpassed the Zacks Consensus Estimate of 67 cents and were 34.6% higher than the year-ago quarter.In fiscal 2011. Earnings came in at $2.39 per share versus $1.38 in the prior year.
FTI Consulting’s total revenue jumped 9.8% year over year to $390.7 million. The upside in revenue was driven by solid performance of Economics, Technology and Forensic and Litigation consulting.
Geographically, the company witnessed solid results in Asia-Pacific (up 72%), Latin America (up 84%) and EMEA (up 26%). In fiscal 2011, revenue increased 11.8% to $1.57 billion on a year-over-year basis.
The company expects total revenue between $1.60 billion and $1.72 billion and diluted earnings per share in the range of $2.80 –$3.00 for 2012.
We remain positive on FTI Consulting as the company’s business is expected to thrive in 2012 due to volatility in the global market. This uncertainty, particularly in Europe, will provide additional business to the global business advisory firm specializing in restructuring and forensic accounting. FTI results also benefited from the addition of LECG professionals and completion of the one-brand strategy.
On the international front, FTI Consulting’s unique capabilities of bringing together damage assessment, accounting, economics, statistics, finance, industry and global footprint makes it an profitable proposition for clients dealing with international arbitration issues, generating continued revenue growth in the existing international operations, coupled with contributions from the acquisitions made over the past 12 months in Europe, Asia and Latin America.
FTI Consulting’s international expansion has been strong. The company expects to further increase revenue over the next four years through growth and acquisitions, the most of which will be from Europe, Asia and Latin America.
Additionally, FTI Consulting expects margins to expand in 2012 as the practices acquired from LECG become less of a drag on margins. Also, the end of brand integration expenses relating to the acquisition will add to the margins.
Moreover, in 2012, the management anticipates booking a large number of strategic consulting assignments. Management believes that Financial Economics practices will continue to experience higher utilization rates and increased client opportunities. FTI Consulting is also experiencing a solid increase in the overall litigation activity level with a pickup in strategic mergers and acquisitions (M&A).
Although the above initiatives place FTI Consulting on strong footing for the longer term, lingering concerns remain in the near term. The company’s organic revenue growth decelerated across each of the company’s segment in the fourth quarter of 2011. Going forward, organic growth is expected to be muted.
Headcount also grew year over year in all the segments during the fourth quarter, except in corporate finance and restructuring and strategic communications. Additionally, in the fourth quarter of 2011, adjusted EBITDA margin of the Forensic and Litigation and Economic segments remained disappointing sequentially from both second and third quarter, due to acquired practices and a ramp-up of productivity.
Furthermore, in 2012, the company expects headcount to increase in Forensic and Litigation Consulting segment, which may hurt the profitability of the company.
Add in corporate finance and restructuring service segment revenue during the fourth quarter, and we do observe some discouragement. That said, the segment reported positive results on a year-over-year basis. Management believes that the restructuring business is stabilizing, but we prefer to remain on the sidelines until the segment remains in positive trajectory for a substantial period.
FTI Consulting currently retains a Zacks #3 Rank, which translates into a short-term Hold rating, while its closest peer CRA International Inc. (CRAI) retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.
CRA INTL INC (CRAI): Free Stock Analysis Report
FTI CONSULTING (FCN): Free Stock Analysis Report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment