We maintain our long-term Neutral rating on Baltimore, Maryland-based FTI Consulting Inc. (FCN) due to the absence of any significant driving factor in the stock. While we remain impressed with FTI Consulting’s one brand strategy as well as international expansion, lackluster performance in Corporate Finance and Restructuring segments and depressed margins will remain a haul.
FTI Consulting’s fourth quarter 2010 earnings of 56 cents per share were slightly ahead of the Zacks Consensus Estimate of 54 cents but deteriorated from the year-ago performance of 71 cents. On a GAAP basis, earnings were 23 cents per share compared with 71 cents in the year-ago period.
FTI Consulting’s total revenue increased 3.4% year over year to $356.2 million, which also came ahead of the Zacks Consensus Estimate of $347.0 million. For full fiscal 2010, total revenue climbed 11.4% year over year to $1.4 billion.
Quarterly revenue benefited from improvements in forensic and litigation consulting, technology and strategic communications businesses, partially offset by a decrease in revenue at corporate finance/restructuring segment.
We also remain positive on FTI Consulting’s brand consolidation strategy, wherein the company plans to bring all its acquired firms under one brand i.e. FTI Consulting by November 2011. FTI Consulting has acquired more than 25 companies over the last five years.
The company’s has also been aggressive in international expansion. During March 2011, the company announced its plans to acquire the majority of LECG Corporation’s remaining European operations. FTI Consulting intends to strengthen its already sound advisory team in U.K. and Europe via this acquisition.
The company expects to add a billion dollars in revenue over the next four years through growth and acquisitions, most of which will be from Europe, Asia and Latin America. In the recently concluded fourth quarter, FTI Consulting delivered stellar performance in Europe. The company’s European score gives it the confidence to expand further in that market.
Although the above initiatives place FTI Consulting on a strong footing for the longer term, lingering concerns remain in the near term. The company’s organic revenue growth is expected to be muted as weak trends of the last several quarters are expected to continue.
We still remain cautious on the stock as Corporate Finance and Restructuring segments remain a drag, due to the decline in health care and transaction advisory services as well as sluggish demand for restructuring activities, which resulted in lower volumes in new assignments.
Moreover, management expects bankruptcy and restructuring activities to remain subdued due to easy accessibility to the debt market in an improving economy, which in turn reduced default rates. However, this factor will serve as a tailwind to the company’s merger and acquisition activities.
Management expects margins in the upcoming quarter to be lower due to the previously announced costs associated with brand conversion, increased investments in the international markets, higher compensation expense, and increased interest costs associated with the cash raised in October through a bond offering.
FTI Consulting currently retains a Zacks #4 Rank, which translates into a short-term Sell rating, while its closest peer CRA International Inc. (CRAI) retains a Zacks #2 Rank, which translates into a short-term Buy rating.
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