Tuesday, November 27, 2007

2 New Recession Plays: Huron Consulting (HURN) and FTI Consulting (FCN)

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I am not buying much here, but looking for some long positions that will zig while the rest of the portfolio zags. Two stocks I have been eyeing for a long while are Huron Consulting (HURN) and FTI Consulting (FCN). I will call both companies plays on a slowing economy and future bankruptcies of 2008/2009. FTI Consulting is the best of class, and Huron is the rebound kid which has faltered of late - so I am buying both to create a mini "consulting" basket. They are also becoming plays on globalization as they expand their presence worldwide. These won't be companies that rocket 30% in a month, but should hold up in a slowing US economy and most importantly are very different type of companies from what I currently have in the fund, so provide some diversification.

A nice article on FTI Consulting vis Investors Business Daily here
  • A business consulting firm with a strong background in restructuring, FTI has been doing some restructuring of its own house. Five years ago, hardly any business was outside the U.S. Now FTI has offices all over the world, offering a broader array of consulting services. About 17% of total revenue -- which is nearing the $1 billion mark this year -- comes from international work. What's more, FD expanded its presence globally, with 750 clients in 20 countries.
  • Smaller foreign acquisitions over the last year also bolstered FTI's presence in Hong Kong, mainland China, Australia and Latin America. FTI intends to keep on making acquisitions, a strategy it's been pursuing for years.
  • "A big driver of its business, honestly, is the globalization of the economy," said analyst Mark Bacurin of Robert W. Baird. "The stronger the presence they can have in growing international markets, the better for the company long-term."
  • FTI hasn't been doing so badly in the recent past. Since 2003, revenue has been growing around 30% a year on average. Factoring in costs for acquisitions and hirings, earnings have grown slower. Last year they actually dropped 2%.
  • But earnings have kicked up this year. In the third quarter they rose 56% from a year ago, to 50 cents a share. Analysts polled by Thomson Financial expect full-year earnings to rise 45% to $1.98, and then 18% in 2008.
  • FTI benefits from what analysts call "event-driven" business -- not exactly the positive kind -- that keeps cropping up in the post-Enron era. New SEC regulations such as Sarbanes-Oxley have helped generate a lot of new business. The latest "event" to help business: the subprime credit collapse.
  • Also from the subprime spillover, Dunn says FTI has been hired by some private, midtier home builders to help salvage assets. It's also helping some midmarket borrowers restructure their debt.
  • Analysts expect FTI's large restructuring practice, which slowed last year, to pick up due to the credit crunch and slowing economy.
  • FTI's experts -- some 1,800 at last count -- help clients with issues dealing with accounting, financial disclosure, fraud, collusion, price-fixing, litigation, antitrust, mergers and restructuring. One subsidiary, Palladium Partners, even sends high-level managers to work in top posts on an interim basis.
  • "They are best of breed in a lot of practice areas they are in," Bacurin said.
Zach over at Zachstocks did a nice piece of Huron Consulting back in October
  • As companies continue to battle the strain of Sarbanes-Oxley, many are turning to consultants to provide efficiency and expertise. At the same time, our litigious society requires vigilance and documentation so that firms are able to fend off accusations of neglect or other liabilities. Huron Consulting (HURN) specializes in litigation, business disputes, regulatory compliance; which puts them in a sweet spot where demand is strong.
  • HURN has a diverse client base serving Fortune 500 companies, mid-size companies, and a strong presence in hospitals and universities. The company has grown both organically and through acquisition since coming public in late 2004. While most of the organic growth has occurred in well established business lines, acquisitions have allowed the company to branch out into additional sectors or geographies. A recent purchase of Glass and Associates strengthened the company’s presence in their Corporate Advisory Service practice and also gave the company a presence in the UK and Germany.
  • Concerns of a decline in the overall economy may be a boon to the company. Statistics point to a resurgence in bankruptcy filings after a sharp decline following the rule changes last year. As this bankruptcy rate upticks, it means more business for the legal functions. At the same time, regulatory compliance is not a discretionary function and so the company should enjoy strength in this are regardless of the economic cycle.
Both companies were upgraded last Friday in fact and at this time Huron's chart turned positive for the first time in a long time.
  • A Banc of America Securities analyst began coverage of FTI Consulting Inc. and Huron Consulting Group Inc. at "Buy" on Friday, expecting both companies to do well during an economic slowdown.
  • Analyst Abhishek Gami said FTI's market-leading bankruptcy practice will benefit from a weakening U.S. economy. Gami said the company, whose clients include top U.S. law firms and large banks, among others, has also advised on high profile restructurings. "The company is positioned to grow in any economic environment, though it should perform particularly well as corporate fortunes turn downward," Gami wrote in a client note.
  • Gami has a $70 price target on the stock and said further catalysts include acquisitions, international growth and expansion of its technology business.
  • Meanwhile, Gami began coverage of Huron Consulting with a "Buy" rating and $86 price target. Gami said Huron specializes in the legal, corporate, health care and higher education sectors and can grow in many economic conditions.
  • Gami said the company bought Glass & Associates earlier this year to prepare for an expected increase in bankruptcy and turnaround activity. "While demand for these services has been slower to materialize than expected ... we believe that it is just a matter of time before the opportunities arise," Gami wrote.
  • Also, Gami said a rise in the company's bill rates reflects the company's ability to execute strongly. Gami said average hourly bill rates have risen about $100 to nearly $300 since the company went public in 2004.
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The companies are not cheap; FTI trades at 25x 2008 estimates and HURN at 22x 2008, but if you believe, like me, the economy is heading for a slowdown and we will see companies begin to head to bankruptcy, their services will become more and more necessary and their earnings growth should be solid for the 2008-2010 time frame.

Technically, FTI Consulting has held up well in this sell off - putting in a series of higher lows. It's 1 year chart is a thing of beauty. It's 20 day moving average is $57.50 which is where I'd like to add to this starter position. The 50 day is down at $55. Current price is just under $59.

Huron Consulting had an earnings miss in late October and investors fled, leaving the stock crushed down to low $60s. But it quickly rebounded to near $70 and for the past 3 weeks the stock has been in a range of $63-$70. It's 200 day moving average has been roughly $66, and its 50 day moving average has been roughly $70 during this time, so it has been turned back at the resistance area of its 50 day moving average for most of the past month. Until Friday, when it gapped up above this area, and has held firm even through yesterday's sell off. I find this very positive technically. So I've begin a starter position today just north of $70.

I plan to add to both these over time - again, these are not like dry bulk shippers or solar stocks that will put on 30% moves (or drops) in 2 weeks, but should be like a Mastercard (MA) or Blackrock (BLK) - slow steady growers over time and increasingly valuable in a slowing economy. More importantly if this global slowdown theory begins to play out, they should be able to hold up and provide a different spin to the portfolio than my typical holdings.

I've started both positions at just under 1% of the fund, 150 shares of Huron Consulting and 160 shares of FTI Consulting. I will look at add to both over time.

Long FTI Consulting, Huron Consulting in fund; no personal positions




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