How To Grow Revenue At Huron Consulting Group

Transcription

1 HURON CONSULTING GROUP, INC. (NSQ: HURN) Current Market Price: $37.96 Fair Price (Conservative): $42 Expected Return: 12% Address Website Exchange Industry Market Cap $ Week Range $ Beta Price/Book 2.0 Huron Consulting Group, Inc. 550 W. Van Buren Street Chicago, Illinois P (312) F (312) NASDAQ Business Services Price/Earnings (Forward) 12.0 Price/Earnings 23.6 (at current prices) Fundamental Analysis INDUSTRY ANALYSIS Global business services market denotes businesses which offer the business-related solutions to companies. The industry offers a range of services like human resources, consulting, security, marketing, logistics, facility management, outsourcing and leasing. This industry is fragmented with production spanning across many places. Moreover the industry has no single dominant player. According to a recent report, the top 50 firms generate a quarter of the overall revenue of the industry. The business services sector was adversely impacted by the financial crisis due to cost cutting. However in late 2011, the industry started recovering albeit slowly. According to NASDAQ, the earnings picture for the Business Services group is better than broader market. Total revenues for the sector were up 0.6 percent in the third quarter of 2012, compared to the 0.7 percent decline for the S&P 500. However the sector's performance was weaker than the broader market, with only 57.9 percent of Business Services companies beating earnings expectations. Page 1

2 According to TechNavio, the world information technology service industry is expected to record yearly market growth of 4 percent between 2010 and Expansion is due to the entry of small IT consulting outfits into the market. Cloud computing is driving the growth. Market Line holds that food, beverage and personal/healthcare represent the leading market segment, representing for over 25 percent of the overall market in 2010 while generating over $22 billion in revenue. Another thumping sector is the world legal services sector, which generated over $585 billion in revenue in 2010, according to Market Line. The market growth is expected to exceed a yearly rate of 5 percent between 2010 and 2015 to reach close to $752 billion. The global legal professional base grew at a yearly rate of more than 1.5 percent for the four-year period ending 2010 to exceed more than 3.28 million professionals. The industry faces many challenges like a dearth of skilled labor in the sectors which can have an impact on future growth possibilities. Moreover non-availability of quality workforce at a reasonable cost might also have bearing on overall operational costs. Page 2

3 INDUSTRY PEST ANALYSIS Economical Economic slowdown affected and is still to return to the path of growth. The sales and eventually growth of the industry is affecting. Health reforms in US will spur the growth for this industry. According to Market Line, the legal services sector is expected to witness a yearly growth rate of 5% between 2010 and 2015 to reach close to $752 billion in revenue. Improved economic conditions in Europe and US will push for greater demand of business services industry's clients which in turn will propel the growth of business services industry. The industry is key player for generating employment and reducing cost. Social Culture and lifestyle is one of the key positive driving force for the Industry. Industry is facing flak for shipping of jobs while it is also appreciated for cost minimisation. Impacts work culture greatly. Political Technological The Technology industry is is one not of subject the key to driving any political force influences for the industry. Technologically Liberal regulatory advanced framwork solutions will enable the industry players to enh ance their offerings. Integrated Stable Government. technological innovation is key to the development of the industry. Page 3

4 Key Revenue growth drivers of Huron Consulting Group The company mainly has three revenue generating segments which contribute to its bottom-line. From FY 2013 onwards the company plans to divide these three segments into five segments namely- Huron Healthcare; Huron Education and Life Sciences; Huron Legal; Huron Financial; and an all other category. 1. Huron Health and Education Consulting- This segment provided research to universities, academic medical centers, and pharmaceutical companies and medical device manufacturers and helped develop and implement strategic, financial, operational, and regulatory solutions. The contribution of segment is huge in total revenue of the company. It alone contributed a whopping 67.0 percent of total revenue in The revenue of this segment increased by 5 percent to $419 million in 2012; an increase from $399 million reported in Huron Legal Consulting -This segment helps corporate legal departments and law firms control costs and improve efficiency related to discovery and operational challenges. It is the second largest revenue contributor to the company total revenue. In FY 2012 the segment contributed 29.5 percent of total revenue. This segment s revenue witnessed an increase of 7.3 percent which totaled to $184.9 million in 2012, up from $172.3 million in Huron Financial- This segment helps corporations address financial and operational matters. The contribution of this segment is not as large like the other two segments. In FY 2012, it contributed a merely 3.5 percent in total revenues. This segment witnessed negative revenue growth of percent which dropped $22 million in 2012, down from $34.9 million reported in SWOT ANALYSIS OF HURON CONSULTING GROUP Strength > Strong client base >Robust growth. >Efficient management team Weaknesses >Requirement of capital for continuous research and development as well as upgrading technologies >Increased competition due to lack of new solutions >Potential business slowdown may be Opportunities > Global reach can fuel the growth further. >Specialized services offering provides ample opportunity > Healthcare reform in US will present significant operational and financial challenges for organizations in a variety of industries which in turn will generate great opportunities for Huran. Threats > Biggest threat is from the current or ensuing economic slowdown > Heavy presence of competitors may lead to price wars. >Labor cost is becoming costlier. >Unavailability of quality workforce at a reasonable rate Page 4

5 Company Analysis Huron Consulting Group has its headquarter in Chicago and is a business services company offering services in diverse industries. It provides services to a wide variety of both financially sound and distressed organizations, which includes leading academic institutions, healthcare organizations, Fortune 500 companies, medium-sized businesses, and law firms. The company witnessed mixed performance from the beginning of the fiscal year. In Q4 and full year 2012 report, the company registered an increase of revenue by $20 million which rose to $626.0 million for the year 2012, up from $606.3 million of the previous fiscal. The Company s main operating segments: Health and Education Consulting, Legal Consulting, and Financial Consulting, contributed 67.0 percent, 29.5 percent and 3.5 percent of full year 2012 s total revenues, respectively. These three segments Health and Education Consulting, Legal Consulting, and Financial Consulting, reported 19.5 percent, 0.2 percent and 32.2 percent increment in revenues in 2012 respectively buoyed by continued market demand for its services. The Company's total operating income for 2012 was $73.4 million compared to $55.4 million in 2011, an increase of 32 percent. EBITDA witnessed an increase of $16 million which totaled $95.8 million in 2012 compared to $79.3 million for the corresponding period in The company registered net income from continuing operations of $36.0 million for 2012, which was significantly higher compared to $21.5 million for the same period last year. Operating income and net income from continuing operations for 2012 comprised goodwill impairment charge, restructuring charges and restatement related expenses which were $13.1 million, $4.0 million and $1.8 million respectively while these same figures were quite higher except for restructuring charges (Goodwill impairment charge $22.0 million, restructuring charges $3.8 million and restatement related expenses $4.6 million) in 2011, reflecting a sharp decline in these expenses. The company also reported an increase in EPS (Basic) by $0.70 cents to $1.66 per share for the year 2012 compared to $0.96 per share for the same period last year. In 2012 report, selling, general, and administrative expenses ( SG&A ) witnessed a marginal increase of 5 percent to $ million, up from $ million of the corresponding period of previous fiscal. However, the company was able to contain its restatement related expenses by a whopping 60 percent from $4.5 million reported in 2011 to $1.78 million in In the same period depreciation and amortization almost remains same, while goodwill impairment charges decreased to $13.1 million from $21.9 million reported in Contributed by reduction in goodwill impairment charges, depreciation and amortization expense along with marginal increase in SG&A, the company s total operating expenses declined to $163.8 million in 2012 from $169.3 million reported in In its 2012 report, the company also registered a total increase of 165 full-time billable consultants which totaled 1,332 for the year 2012 compared to 1,167 in The company also witnessed a marginal increase in full-time billable consultant utilization rate which was 75.6 percent for 2012 compared to 75.3 percent during Page 5

6 the corresponding period of previous fiscal. The average billing rate per hour for full-time billable consultants rose to $229 in 2012 compared to $252 of the year On the tax front, the company reported an increase in income tax expense by $8 million from $21.6 million reported in 2011 to $29.6 million in At the same time the company reported a decline in interest expenses by $4 million to $8.2 million in 2012 from $12.2 million reported in the corresponding period of previous fiscal. For the four months period ended December 31, 2012 revenues were $180.8 million compared to $163.0 million for the fourth quarter of 2011, an increase of 10 percent. In the same period, the company also witnessed an increase in operating income by $14 million to $34.5 million compared to $18.6 million in the corresponding period of Net income from continuing operations was $18.6 million compared to $7.8 million for the same period last year. In fact in Q4 2012, the company witnessed the highest quarterly revenue in Huron s history. On the assets and liabilities side, the company has significantly increased its cash balances by $20 million from $5.08 million in 2011 to $25.16 million in year ended Both total assets and total liabilities increased marginally by $1 million and $5 million respectively by the year-end The total assets rose to $787.8 million in 2012 from $786.6 million in 2011, while total liabilities rose to $225.8 million in 2012 from $220.1 million reported in the same period of previous fiscal. The company s financial leverage TTM also improved considerably and currently stands at Net margin TTM is also considerably in a good position where it stands at 5.34 percent. Huron s PE is lower than the industry average while its PE stands at 23.6 whereas industry average stands at According to James H. Roth, chief executive officer and president, the pace and depth of change in many of its core markets is dramatic, and it is well positioned to help clients. The company also expects the demand for its portfolio of services to be strong throughout For FY 2013, it expects the revenue before reimbursable expenses in a range of $655.0 million to $685.0 million. Page 6

7 Source: Company Website From the above graph it is evident, the stock started the year with an increase and then somehow lost the momentum and even touched the lowest somewhere around June In the second quarter the stock did some unloading due to muted results. Then the stock made correction and picked the momentum albeit with some initial setbacks. However it again plunged to its earlier lowest level in mid-october and then regained the lost momentum. Since then the stock continuously improved its performance. The price is also affected due to cyclical nature of stock. From a long term value perspective we feel the stock is good with good fundamental value and would continue its upward trend with spurred sales coupled with enhanced services by Huron. Key Data Year ended Dec 12 $ 000 s Year ended Dec 11 $ 000 s Year ended Dec 10 $ 000 s Revenue 625, , ,668 Earnings per share US $ (Basic) Book Value Per Share US $ Operating Margin 10.77% 8.43% 6.21% Return on Equity 8.18% 5.17% 2.45% Return on Assets 4.62% 2.61% 1.08% Net Margin 5.34% 3.12% 1.52% Asset Turnover Leverage DUPONT ANALYSIS Page 7

8 ROE=Net Profit Margin x Total Asset Turnover x Leverage The return on equity in FY2012 increased significantly due to the significant increase in net margin and marginal increment in asset turnover. However the leverage decreased considerably compared to FY2011. Since 2010, the asset turnover continues to improve along with net margin. The operating margin also witnessed improvement in FY2012. It is expected that this pattern will continue and asset turnover will further improve with increase in revenue which the company expects to be in the range of $655.0 million to $685.0 million in FY2013. Important Highlights FY 2012 Financial Highlights Increase of revenue by $20 million which totaled to $626.0 million for the year 2012 from $606.3 million of the previous fiscal Adjusted EBITDA was $115.8 million or 18.5% of revenues for the year 2012 against $110.8 million or 18.3% of revenues in the comparable period last year. Operating income for the year 2012 was $73.4 million compared to $55.4 million for year 2011, up by 32%. Net income from continuing operations $36.0 million for the year 2012 compared to $21.5 million for the same period last year, up by 67%. Earnings per share basic also increased $ 0.74 in Q from $ 0.57 reported in Q Increased cash balances by $20 million from $5.08 million in 2011 to $25.16 million in year ended 2012 The total assets rose to $787.8 million in 2012 from $786.6 million in 2011 while total liabilities rose to $225.8 million in 2012 from $220.1 million reported in the same period of previous fiscal. EPS basic increased to $1.66 per share for the year 2012 compared to $0.96 per share reported for the same period last year Operational Highlights Selling, General, & Administrative expenses increased marginally by 5% which amounted to $ million in 2012 from $ million of the corresponding period of previous fiscal. Increase in income tax expense by $8 million from $21.6 million reported in 2011 to $29.6 million in Page 8

9 Increase of 165 average numbers of full-time billable consultants which rose to 1,332 for the year 2012 compared to 1,167 in the same period last year. Marginal increase in full-time billable consultant utilization rate which was 75.6% for the year 2012 compared to 75.3% during the corresponding period of previous fiscal. Average billing rate per hour for full-time billable consultants rose to $229 for the year 2012 compared to $252 of the year RELATIVE VALUATION Industry HURN ADP TRI SGSOY EXPGY FIS FISV Market Cap $870.9 $ 30.7 Billion $ 25.4 Billion $ 19.6 Billion $17.5 Billion $11.1 Billion $11.2 Billion Revenue (2011) 658 USD 9,880 USD 13,807 USD 4,797 CHF 6,243 USD 5,746 USD 4,337 USD Price/Earnin gs TTM Price/Book Price/Sales TTM Rev Growth (3 Yr Avg) EPS Growth (3 Yr Avg) Operating Margin % TTM Net Margin % TTM ROE TTM Debt/Equity Price/Earnin gs Price/Book Price/Sales Page 9

10 Price/Cash Flow Dividend Yield % (Data Source: Although Huron is a new company founded in 2002, it has grown over the years considerably well. Even during the financial crisis, it strongly withered the wrath and quickly returned to growth trajectory. It is evident from the above table Huron has considerably good PE ratio although not best. It has the second highest PE ratio. Its price to book ratio is the fourth highest in the industry. The company also has considerably good net margin and ROE TTM compared to other big players in the industry, given its size. Page 10

11 FAIR PRICE CALCULATION PROFIT AND LOSS ESTIMATES Thousands of Dollar except per share amounts Projected Full Year 2013 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Conservative Optimistic Revenues and reimbursable expenses: Revenues 475, , , , , , , ,632 Reimbursable expenses 39,382 52,303 42,577 43,350 51,580 55,764 66,825 71,503 Total revenues and reimbursable expenses 515, , , , , , , ,135 Total direct costs and reimbursable expenses 340, , , , , , , ,911 Depreciation and amortization 17,191 22,922 21,483 18,372 18,524 18,529 29,171 23,759 Operating expenses: 99, , , , , , , ,397 Other gains 2,687 Operating income 57,974 49,839 42,690 34,699 55,447 73,443 98,373 94,172 Net Other income (expense) -16,488-33,126-20,746-28,280-24,674-15,590-27,978-19,990 EBT 49,730 33,276 32,317 20,559 43,110 65,648 84,384 84,176 Income tax expense 28,439 27,750 18,668 13,132 21,629 29,695 48,257 38,076 Net income from continuing 21,291 5,526 13,649 7,427 21,481 35,953 41,199 46,100 operations Net (Loss) income from 2,989 4,555-46,522 1, discontinued operations Net income 24,280 10,081-32,873 8,525 20,519 36,428 41,199 46,100 Net earnings per share: Basic Diluted Page 11

12 GROWTH RATES AND COST OF EQUITY CALCULATIONS AT YEAR END Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Total assets 443, , , , , ,850 Total Liabilities 259, , , , , ,529 Total Stockholders equity 183, , , , , ,321 Debt Ratio Debt/Equity Return on Assets 5.48% 1.29% -4.36% 1.08% 2.61% 4.62% Return on Equity 13.2% 3.2% -10.1% 2.4% 5.2% 8.2% Capital Expenditure 19,821 12,616 8,500 13,939 21,641 Non Cash Working Capital 30, ,925 28,184 36,742 58,485 Change in Non Cash Working Capital 11,043-30,018-6,425 34,109 8,558 21,743 ROA 4.6% Retention Ratio 88.2% Debt/equity 1.20 Interest rate 8.0% Tax Rate 30.0% Fundamental Growth Rate 3.0% Income Growth Rates Forecast High Growth Period Weight Analysts (Source) FT.Com 27% 0.2 Last Year Growth Rate 71% 0.3 Fundamental Growth Rate 3% 0.5 Weighted Average Forecasted Growth Rates 28.22% Expected Debt Ratio 0.54 Beta 0.81 Risk Free Rate 3% Return from Market 13% 3 Yr Avg Return S&P500 Cost of equity 11% Page 12

13 FREE CASH FLOW TO EQUITY AND FAIR PRICE CALCULATION Conservative All Figures in '000s except per share data High Growth Stable Year 2013 E 2014 E 2015 E 2016 E 2017 Onwards Growth in Revenue 28.22% 28.22% 28.22% 4.0% Net Sales 874,135 1,120,850 1,437,199 1,842,834 1,916,547 Depreciation 29,171 37,404 47,960 61,497 63,957 Net Income 41,199 52,828 67,738 86,856 90,330 CAPEX 27,749 35,581 45,623 58,500 60,840 Change in Non Cash Working Capital 16,507 21,166 27,139 34,799 6,324 Cash Flow to equity 48,160 61,753 79, ,531 91,810 Cost of Equity 11% 11% 11% 11% 11% Terminal value 1,243,717 Present value of cash flows 43,239 49,777 57, ,746 FCFE (In '000) 935,066 No of shares (in '000) 21,905 Share price per share acc to valuation Conservative Current Market Price Return 12% Page 13

14 Optimistic All Figures in '000s except High Growth Stable per share data Year 2012 E 2013 E 2014 E 2016E 2017 Onwards Growth in Revenue 28.22% 28.22% 28.22% 4.0% Net Sales 874,135 1,120,850 1,437,199 1,842,834 1,916,547 Depreciation 23,759 30,464 39,062 50,087 52,091 Net Income 46,100 59,112 75,795 97, ,075 CAPEX 27,749 35,581 45,623 58,500 60,840 Change in Working Capital 16,507 21,166 27,139 34,799 6,324 Cash Flow to equity 55,558 71,239 91, , ,030 Cost of Equity 11% 11% 11% 11% 11% Terminal value 1,463,450 Present value of cash flows 49,881 57,424 66, ,025 FCFE (In '000) 1,095,436 No of shares (In '000) 21,905 Share price per share acc to valuation Conservative Current Market Price Return 32% RISK ANALYSIS Mean Monthly Return = 2.7% Page 14

15 Standard Deviation = 8.6% Beta = 0.81 Comments : Comments : On analyzing the monthly return data of last 3 Years, the results are impressive. The mean monthly return is found to be 2.7 percent. The VaR at 95 percent confidence is found to be percent as shown in the chart above. This shows that there is 5 percent chance that an investment made in the stock might lose more than 10.7 percent in a month which presents a lower risk to an investor when compared to the Benchmark return. Page 15