Future AI Investments Will Improve Productivity In Organizational And Talent Solutions

Key Takeaways

• Strategic transformation engagements and market expansion enhance revenue growth and sustainability, potentially improving net margins.
  
• Investments in AI tools and expansion of services bolster productivity and predictable revenue streams, supporting earnings growth.
  
• Economic and competitive pressures may hinder Korn Ferry's revenue and margin growth despite new business and technology investments.

Catalysts

Engages in the provision of organizational consulting services worldwide.

• Korn Ferry has secured significant transformation engagements with major global companies, indicating a strong demand for their services in strategic transformation and workforce transformation, which can drive future revenue growth.
  
• The company's strategy of diversifying and expanding into larger addressable markets with a wide range of organizational and talent solutions is expected to enhance revenue predictability and sustainability, potentially improving net margins.
  
• Korn Ferry is experiencing growth in new business, particularly in the Americas and EMEA regions, along with an increase in cross-solution referrals, suggesting potential for revenue growth and a positive impact on earnings.
  
• Investments in technology, including AI and Gen AI tools, are aimed at improving productivity and efficiency, which could support net margin improvement as technological enhancements reduce costs.
  
• The company continues to expand its interim and professional search services through acquisitions, cross-referrals, and an increase in cross-referral engagements, contributing to predictable revenue streams and supporting future earnings growth.

Korn Ferry Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Korn Ferry's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.0% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $302.3 million (and earnings per share of $5.87) by about April 2028, up from $243.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.1x on those 2028 earnings, up from 13.1x today. This future PE is lower than the current PE for the US Professional Services industry at 20.8x.
• Analysts expect the number of shares outstanding to decline by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.68%, as per the Simply Wall St company report.

Korn Ferry Future Earnings Per Share Growth

Risks

• The macroeconomic environment for consulting services has been challenging for the last 8 quarters, which could continue to exert pressure on Korn Ferry's revenue growth.
  
• Despite new business gains, there is risk of slower conversion to revenue due to longer implementation time frames for large-scale engagements, potentially impacting cash flow and revenue recognition.
  
• The economic uncertainty and cost of living crisis could limit pricing power for Korn Ferry's services, affecting their ability to maintain or increase profit margins.
  
• Although strides have been made in executive search and temporary recruitment process outsourcing (RPO), competition with large strategy firms and big four accounting firms could impact future market share and revenue.
  
• Investment in new technologies and strategic pivots may take time to yield productivity gains, potentially delaying improvements in net margins and profitability.

Valuation

• The analysts have a consensus price target of $78.75 for Korn Ferry 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 2028, revenues will be $3.0 billion, earnings will come to $302.3 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 6.7%.
• Given the current share price of $61.66, the analyst price target of $78.75 is 21.7% higher.
• 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.