Tactical Hires And Service Expansion Promises Growth Despite Profit Margin Concerns

Key Takeaways

• Strategic focus on expanding services and hiring senior talent across various geographies hints at potential for revenue diversification and growth.
  
• Adjusting compensation plans for enhanced performance and strategic investments in talent and acquisitions indicate a concerted effort toward improving profitability and long-term value creation.
  
• Seasonal slowdowns, investment in new talent, shifts to variable compensation, a slowdown in restructuring activity, and competition could collectively strain profitability and revenue growth.

Catalysts

Provides business advisory services to manage change, mitigate risk, and resolve disputes worldwide.

• The company's organic revenue growth of 12% indicates strong demand for its services, which could lead to sustained revenue growth in the future, impacting overall revenue growth positively.
  
• Plans to correct the shortfall in headcount growth in the second half of the year by hiring senior talent and campus recruits are expected to enhance service delivery capabilities, contributing to future revenue and net margin increases.
  
• The focus on expanding services in areas like business transformation and strategy, transactions, IT privacy and security, and forensic accounting through strategic senior hires across different geographies signals potential for revenue diversification and increase.
  
• Efforts to adjust compensation plans to be more performance-driven, particularly in the Forensic and Litigation Consulting segment, may improve productivity and profitability, thereby potentially increasing net margins.
  
• Commitment to significant investments in senior talent and strategic acquisitions, while maintaining a strong balance sheet with increased cash levels, suggests a forward-looking growth strategy that could drive long-term value creation, impacting earnings positively.

Assumptions

• Analysts are assuming FTI Consulting's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.9% today to 8.3% in 3 years time.
• Analysts expect earnings to reach $361.5 million (and earnings per share of $9.16) by about September 2027, up from $328.9 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 33.4x on those 2027 earnings, up from 23.4x today. This future PE is greater than the current PE for the US Professional Services industry at 27.1x.
• Analysts expect the number of shares outstanding to grow by 5.81% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.2%, as per the Simply Wall St company report.

Risks

• The expectation of a seasonal December slowdown could impact revenue and profitability in the second half of the year, as clients and professionals take vacation time, potentially leading to reduced billable hours.
  
• Upcoming investments in senior talent and the recruitment of over 300 campus hires might strain short-term profitability due to increased compensation and integration costs impacting SG&A expenses and potentially direct costs before these new hires become fully productive.
  
• The shift to more variable compensation plans, particularly noted in the Forensic and Litigation Consulting segment, could impact margins if performance thresholds are met, leading to higher compensation payouts affecting net margins.
  
• A slowdown in restructuring activity, as mentioned, with Q2 levels expected to continue, could affect revenue growth in the Corporate Finance & Restructuring segment if larger engagements do not materialize to offset concluded ones.
  
• Competition and the need for high bill rates in Economic Consulting and Technology segments, coupled with variations in demand for M&A-related antitrust services, could pressure revenue growth and margins if unforeseen decreases in demand occur in these high-growth areas.

Valuation

• The analysts have a consensus price target of $245.5 for FTI Consulting based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.3 billion, earnings will come to $361.5 million, and it would be trading on a PE ratio of 33.4x, assuming you use a discount rate of 6.2%.
• Given the current share price of $217.74, the analyst's price target of $245.5 is 11.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.