We are downgrading our recommendation on FTI Consulting Inc. (FCN) to Underperform from Neutral as a dramatic deceleration is expected in Corporate Finance and Restructuring through the remainder of 2010.
The company’s fourth quarter earnings of 71 cents per share came in only a couple of cents short of the Zacks Consensus Estimate due to disciplined expense management and fewer share count. However, any significant growth was restricted by declining revenues from Technology and Strategic Communication segments.
FCN’s Corporate and Restructuring segment has been witnessing a lull after a boom period given the sluggish economic recovery that has reduced demand and client activity in the area. Moreover, significant interest rate volatility on weak credit markets are adversely affecting the refinancing activities that are expected to further slowdown in the near to medium term.
As a result, the company’s revenue growth guidance for this segment for 2010 also falls short of the projections. While the segment was expected to grow about 13% for 2010, it is now expected to decline by about 5% year-over-year as no significant catalyst can be identified for the segment in the intermediate term.
Moreover, the financial market turmoil and volatility in the capital markets has led to a sharp decline in business decision-making and regulatory activity. While management views this slowdown as a temporary trend, it did have a significant negative impact on FCN’s segment results and was aggravated by the bankruptcy and merger of some of the significant financial service clients resulting in postponement and even cancellation of projects.
Besides, the disruption in the capital markets also caused management to shelve the planned initial public offering (IPO) of FCN’s Technology segment, which had been scheduled to be spun off by the end of 2009. The expected $600-$700 million IPO proceeds could otherwise be used by the company to free it from the existing debts and for other commercial uses. FCN announced that it will delay the filing for an IPO until sometime later in 2010.
Although FCN posed a modest performance in 2009, the road ahead in 2010 appears quite bumpy as no significant growth drivers appear to boost results in the upcoming quarters. The company’s negative growth guidance for Corporate Finance and Restructuring segment and increase in expenses on 5% rise in headcounts has further added to the woes.
Further, the usage of cash in the stock buyback program does not provide substantial catalyst and limits the scope of acquisitions or fruitful investments, thereby challenging stock’s upside in the near term. Moreover, while the share buyback results in a lower share count, it only tends to elevate the market value of the stock.
FCN continues to target annual organic revenue growth in the range of 10-12% for all segments except Corporate Finance and Restructuring for fiscal 2010. Hence, we are downgrading our recommendation to Underperform from Neutral.
On Tuesday, the shares of FCN closed at $36.16, down 0.6%, on the New York Stock Exchange.
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