Company Overview: FTI Consulting, Inc. (NYSE: FCN) is a business advisory company that offers expert consulting services throughout 82 cities around the world with more than 5,500 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. 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.
 

FCN Details
 


Higher Investments and International Expansion Aid FCN: FTI Consulting, Inc. (NYSE: FCN) is a business advisory firm devoted 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. FCN has a diversified business model, which brings together different issues like damage assessment, accounting, finance, economics, statistics, and industry into a single platform. Further, the company continues to engage itself to leverage opportunities in areas such as business transformation services, transaction advisory business, restructuring, data and analytics, retail, construction, cyber business, information governance, and international arbitration. This makes it an exceptional companion for worldwide clients dealing with international settlement issues, thereby garnering revenue growth from the existing international businesses.
 
The company also enjoys a solid global footprint. FCN’s international operations aid to expand its geographic trajectory and add to its top-line growth. In 2019, the company derived ~34% of total revenues from its international businesses. The industrial and geographical diversification of its customer base (across the United States and internationally) helps to lessen the risk of material losses. The company’s international presence remains solid and is expected to continue expanding its geographic reach, going forward.
 
The company remains on track to make strategic investments in hiring very competent professionals and, training and promoting them. Robust staff deployment is a key driver of FCN’s revenues, which increased 16% year over year in FY19. 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. The company is also involved in enhancing its underlying competencies, particularly in investigation, disputes, and restructuring, along with the continuous focus on business transformation, cybersecurity, and corporate reputation. This, in turn, is aiding the company to satisfy the changing requirements and needs of clients.
 
Looking at the historical performance over the period of FY17-FY19, the company’s total revenue improved from $1,808 million in FY17 to $2,353 million in FY19, posting a CAGR of 14.1%. Net income grew from $108 million to $216.7 million in FY19, witnessing a robust CAGR of 41.7% over the same period.
 

Revenues & Earnings Trend (Source: Company Reports)
 
The business model of the company is illustrated by steady cash flows which boost business operations, capital expenditures and the ability to service the indebtedness and carry out its growth plans. Going forward, the company opines that the distinguished expertise, client relationships and goodwill, along with its successful track record, size and geographic diversity, are the most important aspects, which are likely to drive operational and financial efficacy in the everchanging corporate environment.
 
1QFY20 Business Highlights for the Period ended 31 March 2020: During the quarter, the company reported adjusted EPS of $1.53, down 6.1% from the prior corresponding period. The bottom-line was negatively wedged by an 18.5% rise in billable headcount, higher selling, general and administrative expenses, and elevated variable compensation, partially offset by an upsurge in revenues, lower effective tax rate, and gains from foreign-currency translation remeasurement. Revenues for the period increased 9.7% year over year and came in at $604.6 million. This increase in top-line can primarily be attributed to higher demand in the Corporate Finance & Restructuring, Technology business as well as Forensic and Litigation Consulting segments. Adjusted EBITDA in 1QFY20 declined 13.4% on pcp and stood at $83.2 million. 
 

1QFY20 Key Highlights (Source: Company Reports)
 
Segmental Focal Point: During the quarter, revenues from Corporate Finance & Restructuring’s (34% of total revenue) came in at $207.7 million, up 29.1% from the prior corresponding period. The increase was on the back of robust requirement for restructuring, and business renovation and transaction services. Revenues from Forensic and Litigation Consulting’s (24% of total revenues) revenues stood at $147.6 million, depicting a rise of 6.2% year over year on the back of higher demand of data & analytics, disagreements, and inquiry services. Revenues from Strategic Communications (10% of total revenues) were up 1.2% on pcp and came in at $58.4 million, due to an increase in demand for public affairs services. Technology’s (10% of total revenues) revenue during the quarter came in at $58.7 million and soared 14.4% year over year due to strong demand for global cross-border investigation, and merger and acquisition-related services. Lastly, revenues from Economic Consulting (22% of total revenues) stood at $132.1 million, down 7.1% year over year.
 

Segmental Highlight (Source: Company Reports)
 
Balance Sheet and Cash Flow Highlight: The company exited the period with cash and cash equivalents of $223.1 million, up from $179 million as at 31 March 2019. Total debt amounted to $366.2.2 million compared with $316.2 million witnessed at the end of the previous year. During the quarter, net cash used from operating activities amounted to $123.6 million and CapEx was $8.2 million. Free cash flow stood at ($131.8) million. The company repurchased 450,198 shares worth $50.3 million during the quarter.
 

Balance Sheet Highlight (Source: Company Reports)
 
Recent Updates:

1. On June 11, 2002, the company announced that it has appointed three senior managing directors along with one managing director to its Technology segment. The development is likely to strengthen FCN’S global footprint and professional-driven solutions to help clients deal with their legal, regulatory, and data-related disputes.

2. On June 4, 2020, the company’s wholly-owned investment banking subsidiary, FTI Capital Advisors, LLC (“FTICA”), became an investment banker and financial advisor to Ford Models, Inc. on the sale of its business to Ford Models Brasil.

3. In another update, the company stated that it has entered into an agreement to acquire certain assets of Delta Partners for an undisclosed amount. The deal is expected to be closed during the 2QFY20, which is subject to customary closing conditions.

 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 58.41% of the total shareholding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. hold the maximum interests in the company at 10.68% and 10.61%, respectively.
 

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: FCN reported Mar’ 2020 quarter’s gross margin at 33.5%, higher than the Dec’19 gross margin of 30.5%. EBITDA margin, during Mar’ FY20, stood in at 13.8%, higher than the Dec’19 figure of 9.7%. Net margin, in the same time span, stood at 9.4%, higher than the industry median of 5%. ROE for Mar’ 20 came in at 3.8%, higher than the industry median of 2.3%. Mar’20 debt to equity ratio stood at 0.22x, lower than the industry median of 0.65x.

  
Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Risk Analysis: The ongoing macroeconomic and trade worries due to the COVID-led outbreak, might have a denting effect on the demand for consulting services in near to mid-term. Further, changes in capital markets, M&A activity, legal requirements, monetary or geopolitical disruptions, might reduce demand for FCN’s offerings. Also, increasing competition and risks relating to cybersecurity may put revenues and margins under pressure.
 
Outlook: It is worth noting that consulting services is one of the slightest-influenced industries, during the coronavirus led disruption. The reason being that despite a volatile situation, businesses have expanded their search for information and guidance that can assist them safeguard employees and stay close to clients and stockholders. Moreover, the industry is one of the early developers of remote work. The nature of work permits industry participants to get the job done via improved usage of technology. Given this backdrop, FCN stands to benefit in the long-term.
 
The company also remains on track to build a profitable business with sustainable underlying growth, regardless of economic conditions. The company also invests 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. Hence, FCN remains on a growth trajectory to attain double-digit year-over-year Adjusted EPS expansion.
 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 
 
EV/Sales 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 $106.38 with a market capitalization of ~$3.9 billion. The stock made a 52-week low and high of $81.8 and $144.1 and is currently trading below the average of its 52-week trading range. The stock gave a positive return of 24.45% in the last one year but went down ~9.2% in the last three months. The company strategizes to grow organically through higher headcount while improving its market share to provide clients an attractive and evolving suite of services across the segments as well as the industries and geographic regions in which the company operates. Considering the above factors, we have valued the stock using an EV/Sales multiple based illustrative relative valuation method. For this, we have considered peers like Huron Consulting Group Inc (NASDAQ: HURN), Franklin Covey Co (NYSE: FC), CBIZ Inc (NYSE: CBZ), to name 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 $106.38, up 2.04% as on 17 June 2020.
 

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

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