Company Overview: FTI Consulting, Inc. (NYSE: FCN) is a business advisory company that offers expert consulting services throughout 28 foreign countries with more than 6,200 employees. The company has a team of extremely skilled professionals, who deliver problem-solving and technology services primarily to major corporations, financial institutions, and law firms. The company's client list comprises a large percentage of the Fortune 1000 companies, Fortune 500 companies, FTSE 100 companies, as well as the major banks and the top 100 law firms across the globe.

FCN Details

International Expansion & Organic Growth to Aid FCN: FTI Consulting, Inc. (NYSE: FCN) was founded in 1982 and is a business advisory firm dedicated to aid companies in managing change, lessen risk and resolve disagreements through its advisory services of financial, operational, political, legal, and regulatory, reputational and transactional, on a global basis. The company’s ability to club diverse issues like damage assessment, economics, statistics, accounting, finance, and industry under a single platform makes it an exceptional collaborator for worldwide clients.

Talking about 2019, the company derived ~34% of total revenues from its international businesses, which in turn aided FCN to expand its geographic trajectory and add to its top-line growth. The year was also marked by growth across business segments, which aided the company to deliver a solid top and bottom line, resulting in double-digit organic growth in revenues. This depicted the second consecutive year of top-line growth and fifth consecutive year of adjusted EPS growth. The company’s acquisition of certain assets of Delta Partners is likely to strengthen FCN’s strategy-consulting offering and improve its business-revolution and transaction abilities. The company’s international presence remains solid and is expected to expand its geographic reach, going forward.  

Looking at the past performance during FY17-FY19, FCN’s total revenue and net income witnessed a CAGR of 14.1% and 41.7%, respectively. In the days ahead, the company’s recognized expertise, client interactions and goodwill, along with its successful track record and geographic diversity are expected to drive operational and financial efficacy in the everchanging corporate environment.

Past Performance (Source: Company Reports)

The company’s corporate finance and restructuring services are likely to gain traction, owing to robust demand in a number of verticals such as oil and gas exploration, financials, automotive, production and drilling, department stores, telecommunication services, restaurants, entertainment venues, and healthcare. The company is likely to witness higher demand, driven by COVID-19 led pandemic for its capability in crisis communications, litigations linked with material adverse-effect clauses, distressed transactions, and disagreements relating to business disruption.

The company has 5 key business segments, namely (a) Corporate Finance and Restructuring, (b) Strategic Communications, (c) Forensic and Litigation Consulting, (d) Technology, and (e) Economic Consulting.  It is worth noting the consulting services is one of the least-affected industries, during the COVID-19 led crisis. The reason being that despite a volatile situation, businesses have expanded their search for information and guidance that can assist them to safeguard employees and stay close to clients and stockholders. FCN has a steady cash flow business model, which boosts business operations, capital expenditures and the ability to service the indebtedness and carry out its growth plans. The company’s investments in key growth areas along with maintaining a healthy balance sheet and strong cash flows, with an ongoing commitment to return capital to its shareholders are key positives.

3QFY20 Key Financial Highlights: During the quarter, the company reported adjusted earnings per share of $1.54, down 5.5% from the prior corresponding period, due to a 15.8% rise in billable headcount, which was moderately offset by lower selling, general and administrative expenses, and higher revenue base. Revenues for the period increased 4.9% year over year and came in at $622.3 million. This increase in top-line can primarily be attributed to higher demand in the Corporate Finance & Restructuring segments. Adjusted EBITDA in 3QFY20 declined 1.5% on pcp and stood at $90.9 million.

3QFY20 Key Highlights (Source: Company Reports)

Segmental Highlights: During the quarter, revenues from Corporate Finance & Restructuring (38% of total revenue) came in at $236.6 million, up 23.4% from the prior corresponding period. The increase was on the back of robust requirement for restructuring services. Revenues from Forensic and Litigation Consulting (19% of total revenues) stood at $119.1 million, a decline of 16.5% year over year on the back of lower demand from investigations and disputes services. Revenues from Strategic Communications (9% of total revenues) were down 11.7% on pcp and came in at $53 million, due to a $2.3 million fall in pass-through revenues. Technology’s (9% of total revenues) revenue during the quarter came in at $58.6 million and increased 2.6% year over year due to elevated demand for global cross-border investigation, along with litigation services. Lastly, revenues from Economic Consulting (25% of total revenues) stood at $155 million, up 9.4% year over year, owing to robust demand and realized bill rates for M&A-related antitrust services.

Segmental Highlights (Source: Company Reports)

Geographical Highlights: During the quarter, revenues from North America, EMEA, Asia Pacific and Latin America contributed 63.5%, 28.2%, 7.2% and 1.1%, respectively, of total revenues. Although, revenues from North America and Latin America declined 2.4% and 9.5%, respectively, year over year, revenues from EMEA, and the Asia Pacific region went up 23.7% and 16.1%, respectively, on pcp.

Geographical Highlights (Source: Company Reports)

Healthy Balance Sheet and Decent Liquidity: The company exited the period with cash and cash equivalents of $304.7 million, up slightly from $304.2 million in the of prior quarter. Total debt amounted to $341.25 million as compared with $351.25 million witnessed at the end of the previous quarter. During the quarter, net cash generated from operating activities amounted to ~$111.56 million and capital expenditure amounted to $11.8 million. Free cash flow stood at $99.79 million in 3QFY20. The company repurchased 749,315 shares worth $82.9 million, during the quarter. FCN reported Sep’ 2020 quarter’s operating margin at 11.7%, higher than the industry median of 9%. Net margin, in the same time span, stood at 8.1%, higher than the industry median of 5.3%. Sep’20 debt to equity ratio stood at 0.21x, lower than the industry median of 0.48x, demonstrating a sound financial position. The company remains on track to continue investing in key areas with robust cash flow, which provides the company with ample available liquidity for unforeseen events.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Recent Updates: Recently, the company announced that it has appointed Michele Booth, Sumeet Gupta and Vikas Papriwal as Senior Managing Directors in the company’s Corporate Finance & Restructuring segment.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 52.82% of the total shareholding. The Vanguard Group, Inc., and Fidelity Management & Research Company LLC hold the maximum interests in the company at 10.21% and 8.51%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Risk Analysis: Total debt at the end of 3QFY20 was $341.25 million. Further, cash and cash equivalent balance of $304.6 million at the end of the third quarter was below the debt level, highlighting that FCN does not have sufficient cash to meet its debt burden. Further, increasing competition and risks relating to cybersecurity may put revenues and margins under pressure. Further, COVID-19 led outbreak might impact the demand for consulting services in the near to mid-term. Further, changes in capital markets, legal requirements, monetary or geopolitical disruptions, might reduce demand for FCN’s offerings.

Outlook: For FY20, the company expects adjusted EPS to be in the ambit of $5.25-$5.75. Revenues for FY20 is likely to be in the range of $2.42 billion and $2.47 billion.  The company remains on track to make strategic investments in hiring competent professionals and, training and promoting them. Though such investments raise expenses and weigh on the bottom-line in the near-term, these are expected to help the company in the long run.

Revenue Guidance (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of FCN closed at $100.08 with a market capitalization of ~$3.57 billion. The stock made a 52-week low and high of $94.87 and $144.1, respectively, and is currently trading below the average of its 52-week trading range. The stock went down ~9.5% in the last one month. On a technical analysis front, the stock has a support level of ~$95.44 and an immediate resistance level of ~$106.15. Considering the above factors, we have valued the stock using a P/E multiple based illustrative relative valuation method. For this, we have considered peers like Huron Consulting Group Inc (NASDAQ: HURN), Accenture PLC (NYSE: ACN), CBIZ Inc (NYSE: CBZ), to name a few, and arrived at a target price which is offering a lower double-digit upside (in % terms). Hence, we give a ‘Buy’ recommendation on the stock at the closing price of $100.08, up by 0.39% as on 4 November 2020.

FCN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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