Navigant Consulting (NYSE:NCI) May 29, 2009: $11.91
52-week range: $10.59 (Mar. 9, 2009) - $22.78 (Sep. 19, 2008)
Company profile by MSN MoneyCentral:
Navigant Consulting, Inc. (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, 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).
With the dramatic run-up in the market since the March 9TH low, it’s getting harder to find good-quality companies that still trade near their annual or even multi-year lows. Navigant fits the bill on this score closing at $11.91 yesterday versus its September 2008 high of $22.78 and its $10.59 /share panic low of early March this year. In fact, the absolute low prices touched in calendar 2004-2005-2006-2007 were $17.30, $15.30, $17.30, and $12.00 respectively.
The drop in late 2007 was in response to a decline in annual earnings from an all-time record of $1.05 /share in 2006 to $0.66 in 2007. Since then, though, EPS have picked up. 2008 came in at $0.83 and Zacks is looking for slight gains this year and next to $0.86 and $1.06.
Here are NCI’s per share numbers as reported by Value Line:
Based on current estimates NCI shares now trade at < 13.9x this year’s and <11.3x 2009 -2010 projections.
Those are extremely low multiples based on historical norms as can be seen from the chart above.
Morningstar gives Navigant its highest (5-Star) rating and sees ‘Fair Value’ at $18.00 /share.
Value Line sees 3 – 5 year potential of $30 - $40 as earnings rise and the multiple bounces back to higher levels.
Here’s a nice play from here through January 16, 2010 that can provide a great return even if NCI only creeps back up to $12.50
In NCI rises to at least $12.50 (+ 5%) by expiration date:
The $12.50 calls will be exercised.
Your shares will be sold for $12,500.
The $12.50 puts will expire worthless.
You will have no further option obligations.
You will hold no shares and $12,500 for your original $8,260 outlay.
That’s a best-case scenario profit of $4,240 / $8,260 or plus 51% cash-on-cash in about 8.5 months on shares that only needed to rise by 5% or better from the trade’s inception date.
What’s the risk?
If Navigant stays below $12.50 through expiration date:
The $12.50 calls will expire worthless.
The $12.50 puts will be exercised.
You will be forced to buy an additional 1000 shares and to
lay out another $12,500 cash.
You will end up with 2000 shares of NCI.
What’s the break-even on the whole trade?
On the first 1000 shares it’s the $11.91 purchase price less the $1.50 /share call premium = $10.41 /share.
On the ‘put’ shares it’s the $12.50 strike price less the $2.15 /share put premium = $10.35 /share.
Your average cost would be the average of $10.41 + $10.35 / 2 = $10.38 share.
Not only is $10.38 lower than NCI’s 52-week low, it’s below any trading price for Navigant since mid-2003 when earnings, cash flow and book value per share were all half or less than they are today.
NCI shares could drop by 12.8% from yesterday’s closing price without causing a loss on this trade.
Summary: Navigant Consulting appears to be growing slightly even under this year’s poor economic conditions. If the shares rebound by at least 5% by January 16, 2010 you can capture 51% cash-on-cash upside. If we’re wrong and NCI declines by up to 12% you are still profitable and would own double the position at an average price that is lower that the lows since mid-year 2003.
Disclosure: Author is long NCI shares and short NCI options.