Executive Search And On-Demand Talent Focus Will Boost Future Profitability

Key Takeaways

• Strengthening Executive Search and focusing on On-Demand Talent are expected to drive revenue growth and improve profitability across key regions.
  
• Investment in technology, R&D, and client relationships aims to boost operational efficiency and enhance earnings and margins.
  
• Challenges in regional operations, rising costs, and profitability issues are affecting Heidrick's revenue and margins, with investor sentiment also potentially impacted.

Catalysts

Provides executive search, consulting, and on-demand talent services to businesses and business leaders worldwide.

• Heidrick & Struggles are focusing on strengthening their Executive Search capabilities, especially in the Americas and Asia Pacific regions, as well as targeting stabilization in Europe, which could drive revenue growth.
  
• The On-Demand Talent segment is experiencing growth by securing longer duration projects and higher average contract values, improving operating efficiency, potentially impacting profitability and boosting margins.
  
• Heidrick Consulting is aligning its leadership and focusing on core strengths, with a goal towards achieving profitability and scaling strategic offerings, which may enhance future earnings.
  
• A commitment to organic revenue growth with an emphasis on delivering value to clients and developing durable relationships can increase the company’s top line and improve net margins.
  
• Ongoing investment in technology, R&D, and leadership innovation is set to enhance operational efficiency and engagement with clients, potentially leading to increased earnings and improved margins.

Heidrick & Struggles International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Heidrick & Struggles International's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 7.3% in 3 years time.
• Analysts expect earnings to reach $86.7 million (and earnings per share of $4.27) by about December 2027, up from $38.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2027 earnings, down from 24.1x today. This future PE is lower than the current PE for the US Professional Services industry at 25.0x.
• Analysts expect the number of shares outstanding to decline by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

Heidrick & Struggles International Future Earnings Per Share Growth

Risks

• The company is experiencing a slowdown in the temporary staffing space, which could impact the growth and profitability of their On-Demand Talent business, affecting overall revenue and margins.
  
• Europe's operating environment has led to a decline in revenue in that region, showing vulnerability to regional economic instability, which may hinder revenue growth.
  
• Despite recent improvements, Heidrick Consulting has struggled with profitability, indicating potential ongoing challenges in effectively managing this segment, impacting net margins and earnings.
  
• The increase in salaries and benefits expenses, along with general and administrative costs, have put pressure on overall margins, which could constrain earnings if revenue growth does not meet expectations.
  
• The company's effective tax rate is temporarily high due to non-deductible acquisition earn-out costs, impacting net income and possibly affecting investor sentiment regarding earnings performance.

Valuation

• The analysts have a consensus price target of $48.33 for Heidrick & Struggles International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $53.0, and the most bearish reporting a price target of just $42.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.2 billion, earnings will come to $86.7 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 6.5%.
• Given the current share price of $45.45, the analyst's price target of $48.33 is 6.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.