Talent Suite Launch And Trilogy Investment Set To Propel Growth And Enhance Profitability

Key Takeaways

• The shift to subscription-based models for digital services may stabilize and grow recurring revenue streams while enhancing net margins.
  
• Continuous focus on cost discipline has sustainably increased EBITDA margins, indicating potential for higher future profitability.
  
• The company's reliance on assumptions, revenue declines in key areas, and transition to subscription models pose risks to short-term and future earnings stability.

Catalysts

Engages in the provision of organizational consulting services worldwide.

• The launch of the Korn Ferry Talent Suite, a new HR integrated software platform, is expected to enhance revenue streams by providing clients with comprehensive talent management capabilities under subscription agreements.
  
• Investment in Trilogy International expands interim professional offerings in EMEA and North America, potentially boosting revenue in a large, addressable market with a digital and technology focus.
  
• Strengthening the marquee and regional account strategy, where a significant portion of clients use multiple service offerings, could lead to increased revenue and improved net margins through cross-selling opportunities.
  
• A pivot towards subscription-based models for digital services, highlighted by strong new business growth, may provide more stable and recurring revenue streams while improving net margins.
  
• Focus on cost discipline and operating productivity has increased EBITDA margins for six consecutive quarters, suggesting a sustainable increase in profitability and potentially higher future earnings.

Korn Ferry Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Korn Ferry's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.0% today to 10.6% in 3 years time.
• Analysts expect earnings to reach $322.6 million (and earnings per share of $5.61) by about December 2027, up from $243.6 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 17.4x on those 2027 earnings, up from 14.7x 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 grow by 3.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

Korn Ferry Future Earnings Per Share Growth

Risks

• The company's reliance on forward-looking statements which involve assumptions regarding future performance introduces risks and uncertainties that could result in actual results deviating from expectations. This poses a risk to future earnings as assumptions may not hold true.
  
• Consolidated fee revenue is down 4% year-over-year, indicating potential stagnation or decline which could negatively impact future revenue growth.
  
• Interim fee revenue is down by approximately 17% year-over-year, reflecting challenges in the market demand for their professional interim services, directly affecting net margins and overall profitability.
  
• The subscription model for digital services is contributing to a temporary decline in revenue as it transitions from point-of-sale to recurring models. This could impact short-term revenue streams.
  
• Larger consulting contracts with longer delivery windows could lead to revenue recognition delays, impacting the timing of earnings and overall revenue growth forecasts.

Valuation

• The analysts have a consensus price target of $81.5 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 2027, revenues will be $3.1 billion, earnings will come to $322.6 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 6.5%.
• Given the current share price of $69.34, the analyst's price target of $81.5 is 14.9% 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.