Covering Analyst: Bryceson Charlton

Transcription

1 UNIVERSITY OF OREGON INVESTMENT GROUP 11/20/2009 IME Sector FTI Consulting Hold Stock Data Price (52 weeks) Symbol/Exchange FCN / NYSE Beta.659 Shares Outstanding Average daily volume (3 month average) Current market cap Current Price Dividend Dividend Yield 51.8 Million Billion N/A N/A Valuation (per share) DCF Analysis $66.81 (60%) Comparables Analysis Target Price Current Price $39.74 (40%) $55.37 $47.28 Summary Financials 2009 (LTM) Revenue (billion) Net Income (million) Operating Cash Flow 8.39% BUSINESS OVERVIEW FTI Consulting, also known as FTI and FCN, was incorporated in It is a global business advisory that assists its customers in addressing a range of business challenges such as bankruptcy, restructuring, credit issues and indebtedness, mergers and acquisitions, interim business management, electronic discovery, management and retrieval Covering Analyst: Bryceson Charlton bcharlto@uoregon.edu The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG s portfolio. In addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG s portfolio.

2 of electronically stored information, reputation management, and strategic communications. They currently have operations across 37 United States cities and 22 foreign countries. They are located in Baltimore Maryland. Currently 82% of revenue is domestic based in the United States. The following data is based off of the Consolidated Results of Operations: Nine Months Ended as of September 30 th, which came out on November 6 th. Corporate Finance/Restructuring (37% of Revenue, up 46% from 2008) This segment focuses on strategic, operational, financial and capital needs of business around the world. They advise on areas including restructuring bankruptcy, claims management, mergers and acquisitions, post-acquisition integration, valuations, tax issues and performance improvement. Factors which affect demand for this segment include economic conditions, availability of credit, leverage levels, and merger and acquisition. Increased demand for restructuring and bankruptcy services has continued throughout 2009 after initially starting in Forensic and Litigation Consulting (19% of Revenue, up 1% from 2008) Also known as FLC, they provide law firms, companies, and government clients with dispute advisory, investigations, forensic accounting, business intelligence assessments and risk mitigation services. They assist their clients in all phases of government and regulatory investigations, inquiries and litigation, regardless of the subject matter of the proceeding or investigation. A main business driver for this segment is large complex litigation matters; there has been stagnate growth rate in the past year. Strategic Communications (13% of Revenue, down 22% from 2008) The newest category for FTI first started toward the end of 2006 when FTI acquired Financial Dynamics based out of London which gave them their current market share. This segment gives advice and consulting services related to 2

3 financial communications, brand communications, public affairs, reputation management, and business consulting. Business drivers for this company are mainly merger and acquisition activity, public stock offerings, business crises and governmental legislation and regulation. Currently they are being challenged by the dramatically slower volume of M&A transactions and discretionary spending decreasing because of the global recession. Technology (16% of Revenue, down 3% from 2008) A leading information management, electronic discovery service, and software provider, FTI provides products, services and consulting to law firms, companies, courts and government agencies worldwide. Another aspect of this segment is providing a comprehensive suite of application tools to help clients locate and produce ESI. Ringtail technology is used for e-discovery purposes, including litigation support and knowledge management. The other big software for FTI, Attenex, in association with Ringtail enables rapid identification of relevant content for litigation, investigations and regulatory response projects. Contributions from large investigation cases and M&A second requests were offset by significant declines in revenues from product liability cases and lower pricing compared to a year ago. Economic Consulting (16% of Revenue, up 3% from 2008) Provides clients with clear analysis of difficult economic situations and modeling of issues arising in mergers and acquisitions, complex antitrust litigation, commercial disputes, regulatory proceedings and securities litigation. Their higher revenues are a result of the segment s new offices in New York and Los Angeles, acceleration in work for its recently-formed European practice based in London, and improved activity in strategic M&A and financial economic matters. Through these segments they are able to absorb the risk of an uncertain economy. While the majority of their segments are more profitable in a growing economy, their biggest segment, Corporate/Finance Restructuring, thrives in uncertain times. Because of this, they achieved a growth rate of 9% total for the last nine months, a testament to their diversification. BUSINESS AND GROWTH STRATEGIES FTI Consulting has grown greatly over the past years through both acquisitions and organic growth. In 2006 they acquired Financial Dynamics, an acquisition of 267 million. A global strategic business and financial communications consulting firm headquartered in London, FD is what started the company s Strategic Communications. FD has been considered a huge success of the largest single acquisition to date for FTI Consulting. In 2008, they acquired 16 business combinations for a total acquisition cost of million and achieved an acquisition growth for the year of 11.8% and an organic growth of 17.4% The organic growth for 2008 was high because of Corporate Finance/Restructuring and Economic Consulting segments, which benefited directly and indirectly from the current economic and financial challenges. They project a total growth rate of 10 to 12% for the next year with organic growth being 6% of that. FTI Consulting predicts more growth out of Strategic Communications, Technology, and FLC with the expected upturn in the market. There are no forecasts which imply any large acquisition for the future. FTI has issued a repurchase of shares valued at 500 million with 250 million of that accelerated and put into effect November 9 th. They have appropriate cash values and are able to obtain loans quickly to make any reasonable acquisition they feel will increase their profitability. 3

4 MANAGEMENT AND EMPLOYEE RELATIONS Jack Dunn IV, the current CEO, has been with FTI since He has assumed CEO for the company since October He has also held Chairman of the Board, Chief Operating Officer, and is currently the President. In March 2008, Dunn received $997,460 worth of stocks for compensation. Dennis Shaughnessy (Executive Chairman of the Board) received 1.7 million in Stock and Option Awards. There are eight other members of the Board of Directors, giving the group a total of ten with the addition of the two previously mentioned. The remaining eight account for 2.9 million in Stock and Options incentives. They are a service based company and are solely only profitable with the strength of their employees. Therefore there are large compensation benefits that go with their company. In March of 2008, they gave employees million benefits through Stock and Option awards. PORTFOLIO HISTORY FCN is currently held in the DADCO portfolio. A hundred and twenty shares were purchased on February 2, 2004 for a cost basis of or per share. RECENT NEWS November 9, FTI Consulting announces an accelerated stock buyback plan of 250 million to Goldman Sachs from available cash on hand to repurchase shares of its common stock. All repurchased shares are to be retired. The total expected buyback of 500 million is expected to add at least 10 percent to earnings per share in November 4, 2009 The Company released Quarter 3 results. Revenue for the period rose 7.1% to million from million; net income increased 42.5% to 37.6 million from 26.4 million from previous years Quarter 3. Analyst had EPS projected at $0.66 while actual was $0.7. They also announced the execution of a stock buyback agreement of 500 million. November 2, 2009 FTI Consulting, Inc. announced the launch of FTI Journal, a new quarterly publication of business commentary. FTI Journal explores transformational business events and offers insights for business leaders and their advisors. INDUSTRY FTI Consulting operates in the US under the Management Consulting Industry. Management consultants provide a variety of items already discussed with FTI along with human resource policies, strategic and organizational planning, financial planning and budgeting, and marketing objectives. Growth Outlook 1. Economy. With the troubles of the economy special consultants are going to be needed in great demand as many countries are going to face some measure of restructuring, increased regulation or a changed consumer landscape. Financial and Automotive companies are the best example of these. 2. Technology is only being used in greater demand as time goes on. This bodes well for FTI Consulting as they have a Technology segment already which is profitable. However cross competition could emerge with tech companies getting into the field. 4

5 3. Competition from cheaper foreign markets is unlikely as Management Consultants are more in demand for face to face time and domestic knowledge of laws and the economy. 4. Expansion to foreign countries is a good possibility however as stated in the previous point domestic knowledge is key in this field and can hinder a company s expansion. Over the five years to 2014, real industry revenue is expected by IBISWorld to increase at an average annual rate of 3.8% to $ billion. Recovery from recession will encourage many industries to restructure, leading to heightened demand for strategic assistance, while expanding service offerings will encourage greater involvement by consultants in the implementation of their recommendations. IBISWorld Growth Rate of Management Consulting Industry S.W.O.T. ANALYSIS Strengths Diversification to the economy. The previous three quarters of 09 they obtained a total growth rate of 10.5% with the declining economy. Current employed professionals are the top talents of each respective field. With those employees, the brand name of this company is a huge asset to their business. Announced a share buyback of up to 500 million and already paid 250 million to Goldman Sachs for those shares. They are vastly outperforming their competitors. Able to shift professionals to other segments if need be, keeping their utilization rates high. Weaknesses If they do not manage the utilization of their professionals, profits will decline. High costs to hire and retain their professionals will keep growing. Are subjected to currency exchange rates. Opportunities Continue to acquire businesses with their strong operating cash flow. Economy looks to be improving which will help grow its other segments besides Corporate Finance/Restructuring segment. Foreign growth opportunities. Threats Some engagements contain performance-based arrangements in which FTI earns a success fee if a certain predefined outcome occurs. This can cause variations in revenues and unexpected loss in earnings. Failed acquisitions if cultures are too diverse or utilization is not what they projected when they bought the company. 5

6 Facing price competition in their Technology segment. CATALYSTS Discuss the upside and downside catalysts What moves the stock price? What type of market surprise will help this company, specifically (not Beat earnings expectations ) Upside If the economy grows as expected this year, all sectors should show relative positive improvement of growth with the exception of Corporate/Restructuring Financing. Announcement of Share buyback plan. Downside Failure to win a big case, stock price could fall. Stock price is not recession proof to the economy. COMPARABLES ANALYSIS I weighed my comparable analysis only 40% of my implied price because of the lower market cap of my comparables and their lack of variety of services offered compared to FTI Consulting. The main asset wthich these companies lack towards FTI is the technology segment. While these companies are all consulting companies, FTI easily has a greater reach of consulting in different categories. This makes them able to be obtained by clients on almost any matter possible for that client. With FTI s market cap (2.48B) compared to the following market cap respectively for these companies: 680M, 505M, 278M and the previous reasons stated I felt that I should weigh my DCF slightly more than my comparable analysis. Navigant Consulting, Inc. (NCI) Weighted: 40% Navigant Consulting, Inc. (NCI) is a specialty consulting firm combining integrated solutions to assist companies and their legal counsel in addressing the challenges of uncertainty and risk, and leveraging opportunities for overall business model improvement. Services include dispute, investigative, financial, and operational and business advisory, risk management and regulatory advisory, strategy, economic analysis and transaction advisory solutions. Navigant is the most comparable to our companies out of the selected ones because of the services it provides, revenue, and employees. 6

7 Huron Consulting Group Inc (HURN) Weighted: 40% Huron s principal activity is to provide financial and operational consulting services. It does this between four segments: Financial Consulting, Legal Consulting, Health and Education Consulting, and Corporate Consulting. Similar to FTI because they are in Legal, Corporate, and Financial consulting, which are all segments that FTI Consulting compete in. They also have relatively close number of employees. CRAI International, Inc (CRAI) Weighted: 20% CRAI International, Inc. is an economic, financial, and management consulting services firm. It works with businesses, law firms, accounting firms and governments in providing advice and a range of services around the world. The Company offers services to its clients in matters, such as mergers and acquisitions, new product introductions, strategy and capital investment decisions, and complex litigation. While all of their work relate greatly to our field, they are such a smaller Market Cap and its Net Income were vastly smaller than those of FTI Consulting. The metrics I used were EV/Revenue, EV/EBIT, and EV/OCF. I felt EV/Revenue was a common multiple to use to see how close companies were to FTI in EV and Revenue. EV/EBIT was a good multiple because the comparable companies I used for this report had a tax rate noticeably higher than FTI Consulting. Finally I used EV/OCF was good to see how good they were at generating operating cash flow for how big their company was. DISCOUNTED CASH FLOW ANALYSIS I calculated my DCF using the percentage of sales method. My beta of.659 was regressed against the S&P 500 monthly for 5 years ( ) using the regression formula on excel. Yahoo predicted a beta of.66 for this stock so I feel this strengthens the reliability of my beta. My comparables have an average beta of.62, which is very close to FTI. One thing to notice, in the past update the beta then was.299 so it has gone up a fair amount since then. Revenues In the most recent conference call management predicted growth over the next year to be 10-12% with organic growth being a constant 6% of this number. This number goes along with what analyst s estimates are. Although their past 4 years they had an average growth rate of 28%, that did decline down to 10.5% of 2009 with the 4 th quarter estimate. The main reason for growth declining is the lack of acquisitions in the foreseeable future. If acquisitions are obtained, the growth rate for revenues will rise. Cost of Revenue FTI s cost of revenue relies solely on the distribution of salary and wages. As revenue increases so will these administrative costs as pay or staff will be increasing. It stayed constant in the backdated years so I kept it constant at 55.9% throughout the projections. SG&A Expense I have predicted SG&A expense to remain constant at 25.7%. Looking at the historical data, it never fluctuates more than a percentage point so I believe this is a reasonable rate. The highest historical percentage is 25.5% which we are slightly larger than given any unforeseeable increases. 7

8 Litigation Settlements Have in the past been insignificant (never above.5% of revenue) in terms of percentage towards revenue. Because of this, I chose not to forecast this cost in my DCF and the uncertainty to predict. Tax Rate Management predicts the tax rate to stay the same or maybe decrease a small amount. Currently it is at 39% while in 2006 it was 46.9%. The reason for this sizeable drop was based on strategy to reduce the amount of foreign earnings that were subject to U.S. federal income tax. There was also a reduction in state income taxes and a decrease in nondeductible expenses as a percentage of taxes. Therefore, I do not see the tax rate rising and kept it at 39% to the terminal year even though FTI has suggested it may be reduced in the future. Depreciation I decided to keep the rate at 3.8% for my beginning as I do not see any large acquisitions in the future. However, this doesn t mean there won t be huge acquisitions as there have been in years 2006 and With the company continuing to grow, these acquisitions won t be such a large percentage of the company and depreciation rates, if we do acquire them, won t rise so fast. I did, however, increase it to 4.4% as a safeguard if they do acquire another sizable company in the next 10 years which is a good possibility. Net Working Capital Assets and liabilities are projected to keep with an equal pace of revenues. Capital Expenditures I estimated this by taking the percentage it was for the last current year of 2009 at 8%. I kept this for the next three years and then I slowly increased it in case of more acquisitions which if you look in the past (2006, 2008) there is a very good chance for this to happen. I tried to make this number prepared for medium size acquisitions, not the size of the ones in the two previous stated years. Return on Debt I looked at the most recent debt bearing interest from the 10 K and took the average of their three outstanding debt rates which gave me 6.38%. RECOMMENDATION As stated on the Comparable Analysis page I decided to put 60% of my implied price to the DCF and 40% to my Comparable Analysis. Growth looks to decline in the future partly because lack of future acquisitions, its estimated to only declining to 10-12% in the next few years. With the economy upturning many of FTI s segments should have a relative good positive growth rate. Future growth as of now is considered only to be mostly organic, however if FTI makes any unexpected acquisitions which has happened in the past this growth rate (if acquisition is successful) should rise significantly. With their announced share repurchase plan and my implied price of a 17% undervalue to the company I believe that FCN is a hold for the DADCO portfolio. 8

9 APPENDIX 1 COMPARABLES ANALYSIS Comparables Analys FCN NCI HURN CRAI In Thousands of Dollars 40% 40% 20% Current Share Price Shares Outstanding EPS Market Cap 2,449, , , ,453 Average Volume (3 Month) 810, Long-Term Debt (mrq) Enterprise Value 2,553, , , , Revenue(ttm) 1,379, Ebit(ttm) 262, Gross Profit 598, OCF(ttm) Net Income(ttm) Beta P/E EV/Revenue EV/EBIT EV/OCF Weighted Average Implied Price EV/Revenue % EV/EBIT % EV/OCF % o Implied Price Current Price Overvalued 24% 9

10 APPENDIX 2 DISCOUNTED CASH FLOWS ANALYSIS All Numbers in Thousands 2004A 2005A 2006A 2007A 2008A 2009Q1-Q3A 2009 Q4 E 2009 A+E TOTAL REVENUES 427, , ,933 1,001,270 1,293,145 1,057, ,917 1,428,925 1,600, ,989,613 2,188,574 2,407,431 2,600,026 2,756,027 2,866,268 2,980,919 % Growth 13.7% 26.4% 31.2% 41.4% 29.2% 10.5% 12.0% 12.0% 11.0% 10.0% 10.0% 8.0% 6.0% 4.0% 4.0% Direct Cost of Revenue 234, , , , , , , , ,622 1,001,976 1,112,193 1,223,413 1,345,754 1,453,414 1,540,619 1,602,244 1,666,334 % of Revenue 55.0% 54.0% 55.0% 54.8% 54.6% 54.9% 58.2% 55.7% 55.9% 55.9% 55.9% 55.9% 55.9% 55.9% 55.9% 55.9% 55.9% Gross Profit 192, , , , , , , , , , , ,161 1,061,677 1,146,611 1,215,408 1,264,024 1,314,585 Gross Margin 45.0% 46.0% 45.0% 45.2% 45.4% 45.1% 41.8% 44.3% 44.1% 44.1% 44.1% 44.1% 44.1% 44.1% 44.1% 44.1% 44.1% SG&A expense 106, , , , , ,571 92, , , , , , , , , , ,096 % of Revenue 25.0% 23.7% 25.1% 25.5% 25.5% 24.8% 25.0% 24.9% 25.7% 25.7% 25.7% 25.7% 25.7% 25.7% 25.7% 25.7% 25.7% Depr & Other Amortization 6,836 6,530 20,276 25,202 39,166 39,893 14,133 54,026 54,413 62,736 69,636 76,600 84,260 91,001 96, , ,332 % of Revenue 1.6% 1.2% 2.9% 2.5% 3.0% 3.8% 3.8% 3.8% 3.4% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Operating Income 78, , , , , ,747 48, , , , , , , , , , ,157 % of Revenue 18.4% 21.1% 17.0% 17.2% 16.9% 16.5% Interest Income 788 1,875 2,119 7,639 8,685 6,176 2,232 8,408 9,602 10,755 11,938 13,131 14,445 15,600 16,536 17,198 17,886 % of Revenue 0.2% 0.3% 0.3% 0.8% 0.7% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% Interest Expense and Other 6,399 15,064 28,949 43,857 41,051 29,631 1,116 30,747 35,209 39,434 43,771 48,149 52,963 57,201 60,633 63,058 65,580 % of Revenue 1.5% 2.8% 4.1% 4.4% 3.2% 2.8% 0.3% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% Litigation Settlement 1,672-1, , % of Revenue 0.4% -0.3% 0.0% -0.1% -0.1% -0.1% -0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.1% Special Charges Income before tax 74,055 97,187 70, , , ,581 49, , , , , , , , , , ,462 % of Revenue 17.3% 18.0% 10.0% 13.5% 14.3% 14.2% 13.3% 14.0% 13.4% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% Income Tax 31,177 40,819 33,127 52,053 72,263 58,727 19,267 77,896 83,637 92, , , , , , , ,620 Tax Rate 42% 42% 47% 38.5% 39% 39% 39% 39% 39% 39% 39% 39% 39% 39% 39% 39% 39% Net Income 42,878 56,368 42,024 92, , ,453 30, , , , , , , , , , ,842 Net Margin % 10% 10% 6% 9% 10% 10% 8% 9% 11% 11% 11% 11% 11% 11% 11% 9% 9% Add Back: Depr/Amort 6,836 6,530 20,276 25,202 39,166 39,893 14,133 54,026 54,413 62,736 69,636 76,600 84,260 91,001 96, , ,332 Add Back: (1-TR)*Int Exp 3,711 8,737 15,366 26,972 25,041 18, ,756 21,477 24,055 26,701 29,371 32,308 34,892 36,986 38,465 40,004 Operating Cashflow 53,425 71,635 77, , , ,421 44, , , , , , , , , , ,178 % of Revenue 12.5% 13.3% 11.0% 14.4% 14.7% 15.6% 12.1% 14.7% 15.9% 15.9% 16.1% 16.1% 16.1% 16.1% 16.1% 14.3% 14.3% Current Assets 148, , , , , , , , , , ,931 1,068,024 1,174,826 1,268,813 1,344,941 1,398,739 1,454,689 % of Revenue 34.8% 55.3% 41.7% 66.1% 42.7% 66.0% 48.8% 48.8% 48.8% % 48.8% 48.8% 48.8% 48.8% 48.8% Current Liabilities 88, , , , , , , , , , , , , , , , ,982 % of Revenue 20.7% 19.4% 25.2% 38.1% 32.8% 35.5% 26.3% 26.3% 26.3% 26.3% 26.3% 26.3% 26.3% 26.3% 26.3% 26.3% NWC 60, , , , , , , , , , , , , , , , ,707 % of Revenue 14.1% 35.8% 16.5% 28.0% 9.9% 22.5% 25.3% 25.3% 25.3% 25.3% 25.3% 25.3% 25.3% 25.3% 25.3% NWC 45, ,967-76, , , , ,100 38,604 42,996 44,363 44,766 49,243 43,334 35,100 24,804 25,796 Subtract NWC 14,930 60, , , , , , , , , , , , , , , ,910 Purchase of Prop & Equip 11,939 17,827 30,359 36,422 35,674 42,360 14,877 57,237 48,012 50,076 52,430 54,894 57,474 60,176 63,004 65,965 69,065 % of Revenue 2.8% 3.3% 4.3% 3.6% 2.8% 4.0% 4.0% 4.0% 3.0% 4.3% 4.7% 4.7% 4.7% 4.7% 4.7% 4.7% 4.7% Acquisitions 1,253 52, ,332 32, ,541 38,100 13,389 51,489 57,614 64,528 49,740 54,714 60,186 65,001 68,901 71,657 74,523 % of Revenue 0.3% 9.7% 37.8% 3.2% 26.7% 3.6% 3.6% 3.6% 3.6% 3.6% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Capital Expenditures (PPE) 11,939 17,827 30,359 36,422 35,674 42,360 14,877 57,237 48,012 50,076 52,430 54,894 57,474 60,176 63,004 65,965 69,065 % of Revenue 3% 3% 4% 4% 3% 4% 4% 4% 3% 4% 5% 5% 5% 5% 5% 5% 5% Free Cash Flow -3,825-79, ,025-56, ,768-71,039 16,684-92,455 62,477 74, , , , , , , ,793 PV of FCF 16,387 (92,455) 57,104 63,460 88,031 95,130 99, , , , ,942 10

11 APPENDIX 3 DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS Assumptions for DCF Analysis Terminal Growth Rate 3.00% NPV of FCF 865,975 Tax Rate 39.0% Terminal Value 5,006,897 Risk Free Rate 3.45% PV of TV 2,573,613 Risk Premium 7.00% Firm Value 3,880,111 CAPM 8.07% LT-Debt 418,000 % Equity 85.41% Equity Value 3,462,111 Costs of Debt 6.38% Shares Outstandin 51,813 % Debt 14.59% Implied Price WACC 7.46% Current Share Valu Beta 0.66 Under-Valued 41.3% Comps Implied Price DCF Implied Price Weighted Average Price Current Share Price Undervalued 17.11% 11

12 APPENDIX 4 BETA SENSITIVITY ANALYSIS SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 60 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable

13 APPENDIX 6 SOURCES IBISWorld FactSet 13