Navigant Consulting: Continuing to Grow

Apr.21.09 | About: Navigant Consulting, (NCI)

Navigant Consulting, Inc. (NYSE:NCI) is a specialty consulting firm combining integrated solutions to assist companies and their legal counsel in addressing the challenges of uncertainty and risk, and leveraging opportunities for overall business model improvement. Professional services include dispute, investigative, financial, and operational and business advisory, risk management and regulatory advisory, strategy, economic analysis and transaction advisory solutions. The Company operates in four segments: North American Dispute and Investigative Services, North American Business Consulting Services, International Consulting Operations, and Economic Consulting Services. On May 1, 2008, the Company acquired Chicago Partners, LLC (Chicago Partners). On December 31, 2008, the Company acquired The Bard Group, LLC (Bard).

Company description by MSN MoneyCentral

Despite recessionary conditions, Navigant posted higher year-over-year earnings in each of the past two quarters. Full year 2008 EPS came in at $0.83 versus 2007’s $0.66 for a 25.76% increase.

Consensus views look for further gains this year and next. Zacks sees $0.91 and $1.06 on tap for 2009 and 2010. NCI shares now trade at just 13.8x this year’s and 11.8x 2010’s projections. Historically these shares have commanded much higher multiples. Their 10-year median P/E has been 27x with the lowest full year average P/E of the past 12 years was 19.1x in 2006.

The stock looks cheap. NCI shares hit peak prices ranging from $20 - $28.30 at some point in each calendar year 2003 right through 2008 and they were $22.78 as recently as last September right before the Lehman bankruptcy sent almost all stocks way down. NCI has been as high as $16.20 already in 2009.

Value Line has Navigant pegged to outpace the market due to its good EPS momentum and sees it returning to a 21 multiple over the next few years. Morningstar rates NCI as four stars (out of five) and assigns a ‘fair value’ of $18.00.

A bounce back to even 17 times the $0.91 estimate would bring NCI shares back to $15.47 by year end. Here’s a great buy/write combination play for the next six months that can provide outstanding total return if that occurs.

……………………………………………….. Cash Outlay ……… Cash Inflow

Buy 1000 NCI @$12.99 …….......….……… $12,500

Sell 10 Oct. $15 calls @$1.00 ……………...……………………… $1,000

Sell 10 Oct. $12.50 puts @$1.90 ……....……………………….…. $1,900

Net Cash Out-of-Pocket …......….………..…. $9,600

If NCI shares are > $15 by October 16th (up 20% from today’s quote):

  • Your $15 calls will be exercised.
  • You will sell your shares for $15,000.
  • Your $12.50 puts will expire worthless (a good thing for you as a seller).
  • You will have no further option obligations.
  • You will end up with no shares and $15,000 cash for your original outlay of $9,600.

That’s a 56% best-case scenario profit in just six months on shares that only needed to go up by 20% from the trade inception price.

What’s the static return if the shares go nowhere?

  • Your $15 calls and your $12.50 puts will each expire worthless.
  • You will still own 1000 shares of NCI worth $12,500.
  • You will have no further option obligations.
  • You will hold $12,500 of value for your $9,600 original outlay.

That’s a total profit of 30% in just six months on shares which did not go up.

What’s the Risk?

If NCI shares go below $12.50 by October 16th:

  • Your calls would expire worthless.
  • You would be forced to buy another 1000 shares and to lay out an additional $12,500 cash.
  • You would end up with 2000 shares of NCI.

Your break-even on the whole trade would be figured as follows:

  • On the first 1000 shares it’s the $12.50 purchase price less the $1.00 /share call premium = $11.50 /share.
  • On the puts it’s the $12.50 strike price less the $1.90 put premium = $10.60 /share.

Your break-even is the average of those prices:

  • $11.50 + $10.60 / 2 = $11.05 /share.

Navigant shares could drop by up to $1.45 or (-11.6%) without causing a loss on this trade.

While no one can guarantee NCI shares won’t trade below $11.05 I can tell you that price is lower than the lows ever touched during 2004 right through 2007 and not far from the six-year low hit when the DJIA bottomed on March 9th this year.

With 30% upside if the shares are unchanged, a 56% maximum gain and downside protection of > 11%, the risk/return on this NCI combination looks outstanding.

Disclosure: Author is long NCI shares and short NCI options.