Seeking Alpha
Profile| Send Message|
( followers)  

Exponent Inc. (NASDAQ:EXPO) is a leading firm in the engineering and scientific consulting industry. The company offers solutions tailored to meet every client's complex technical problems. The firm has a reliable and multidisciplinary team of physicians, scientists, engineers, and regulatory consultants who are trained to carry out rapid-response evaluations or in-depth scientific research and analysis as the case may be.

Exponent has continued making waves as far as analyzing failures and accidents are concerned. Through the company's analysis, it is able to determine causes of the failures and accidents, including understanding certain preventive measures.

A little about the company

Exponent was actually founded in 1967 by five Ph.D-level researchers named Professor Alan Stephen Tetelman, Dr. Bernard Ross, Dr. John Shyne, Dr. Marsh Pound and Dr. Sathya V. Hanagud. They are experts in the fields of engineering mechanics, materials science, and structural analysis. The company started under the business name Failure Analysis Associates, with an initial capital of $500. The company's headquarter is in Menlo Park, California.

From 1967 to early 1970s, the company's main focus was in the energy industry. It then proceeded to cover other industries, carrying out structural and stress analysis and others. In 1989, a holding company came into existence with the name, The Failure Group, Inc. By late 1990, it started trading on NASDAQ as FAIL. From then onward, the company's management started exploring the possibility of forming alliances with other companies that offer services that will complement what FAIL already offered.

The company then proceeded to engage in a couple of acquisitions, after which it saw the need for a new name for the company. This stemmed from the fact that it no longer offers just failure analysis services but has expanded its coast. Precisely in March, 1998, the management came up with the name Exponent and took it from there. The company opened its first office in China in June, 2005. The China branch of the company is targeted toward the U.S. and other international companies with operations in East Asia, especially those in need of technical support.

By 2008, the company's presence became established in Europe through its office in Switzerland. It then proceeded to establish other offices in United Kingdom, and Germany through which it services its European clients.

Operating segments

The company's operation is based mainly on two primary areas of service - the Engineering and other scientific segment and the Environmental and health segment. While the engineering and other scientific segment covers consultations bordering on engineering and technology developments, the environmental and health segment offers analysis services on environmental, epidemiology and health risks, which span across environmental hazards and risks with their attendant adverse impact on human health and the environment.

Presently, Exponent offers its service in over 90 different disciplines. The company operates from its 20 U.S. and 5 international office locations with more than 900 employees, a good number of them being Ph.Ds and M.Ds.

Series of acquisitions

The company seems to have embraced the strategy of expansion through acquisition. In 1996, while it was still bearing The Failure Group, Inc., the company acquired Environmental Health Strategies. That acquisition has turned out to be a blessing to the company as it now serves as its Health Centers and one of the company's largest growth practices.

In 1997, precisely in May, The Failure Group acquired Performance Technologies, Inc. This acquired company now represents Exponent's Environmental Practices. In May, 2002, Exponent acquired Novigen Sciences, Inc. This particular acquisition now serves as the company's Center for Chemical Registration and Food Safety.

Competition

There is hardly any company or business that does not have competitors in the industry it operates in. The same thing applies to Exponent. The company operates in a fragmented marketplace and as such, it faces different sources of competition as far as provision of its services is concerned. This means that in each of the company's practices and centers, there are principal competitive factors, which include ability of the company to deliver its services on timely basis and the technical capability of its staff.

All these factors are not beyond what Exponent can offer its various clients, no matter the scope of the project as far as it is within the segments it covers. The company competes favorably amongst its peers in the industry, even though some of them offer competitive rates for their services.

One thing that has led to a considerable increase in competition in the markets the company operates in is that the barriers to entry into the markets are low. However, the company's management is handling the increasing competition by giving its best and at the same time, looking out for new markets that will benefit its technical disciplines.

Future Outlook

Exponent's management is not known for folding its hands and watching the world roll by. This is why it has channeled its focus on bringing more top talents to its already growing list of the best hands in the industry. The company also pays maximum attention to developing skills needed to help it expand in the industry it already operates in and maintain its leading position.

Exponent is also capitalizing on emerging growth areas in the markets it operates in. This is apart from its ability to maintain a strong balance sheet and at the same time, engaging in share repurchases in order to further enhance shareholders' value.

Finally, the company expects some slowdown in the level of activity recorded in its defense technology practice. This is mainly due to the cut on defense spending and limited number of U.S. forces operative in Afghanistan.

Comparative analysis

Exponent does not have close competitors to be compared to since the company operates in a fragmented marketplace. Based on this, a comparative analysis is carried out comparing Exponent, S&P 500, USA Industrials and USA/Professional SVC. The result is what you have below.

(click to enlarge)

Past 90 days.

Source: markets.ft

The company's better-than-expected performances

In several instances, Exponent has experienced considerable growth and also exhibited better-than-expected results in various areas. From a Guru analyst' report, the company maintained 11.93% three-year net profit margin, exceeding the firm's average of 5%.

The company also experienced an increase of 17.30% on YoY growth in earnings per share. Its five-year annualized earnings per share growth is commendable relative to the industry average. Exponent exceeded Q1 analysts' consensus estimate of 0.44 per share as it reported earnings of 0.560.

(click to enlarge)

The stock's trend within a 5-year period.

Source: markets.ft

Another area where it exceeded analysts' estimates is the Q1 fiscal 2013 revenues. It beat the estimated $64.92 million to report $68.99 million, a 6.06% increase in comparison to the same quarter of the previous fiscal year.

Risks

Risk is something that is inherent in the environment Exponent operates in. The environment is such that it experiences rapid changes every now and then, changes which are mostly beyond the company's control. From the company's 4 pages of risk factors, I picked a couple of risk factors. They are:

  • Reduction in price as a result of competition: As pointed out earlier, the company operates in highly competitive markets with low barriers to entry and as such, will continue to face stiff competition from both existing competitors and new entrants. Based on this, there is the risk of the company's financial results suffering as it tries to offer competitive prices on its services, especially as some of these new entrants might offer prices lower than what is generally obtainable in the market. If this happens, it is sure to have adverse effect on the company's financial condition and the shares of stockholders.
  • Effects of downturns in the economy: The markets the company serve are cyclical in nature and as such, impacted by prevailing economic situations. With the uncertainty of the direction and strength of the global economy, should there be any slowdown with minimal chances of speedy improvement, it will affect the company's operations as its clients might choose to either consolidate or shut down business. Should this happen, the volatility of the company's stock will then come to the fore as it will exhibit rise and fall trends.

Q1 fiscal 2013 financial results

The company reported net revenues of $68.99 million for Q1 of fiscal 2013. This shows a 4% increase in comparison to $66.5 million reported in the same quarter of the previous fiscal year. Total revenues for the reported quarter stood at $72.7 million in comparison to $71.9 million reported in the same quarter of the previous year.

The company's net income for the quarter stood at $8.0 million or $0.56 per share in comparison to $8.2 million or $0.57 per share reported in the same quarter of the previous year. The company's diluted share count decreased to 14.1 million in comparison to 14.4 million reported in the same quarter of the previous year. This was as a result of the company's active share repurchase program.

Exponent reported EBITDA of $14.6 million for Q1 of fiscal 2013, in comparison to $14.8 million reported in the same quarter of the previous fiscal year. EBITDA margin percentage stood at 21.2%, in comparison to 22.3% reported in the same quarter of the previous year. Net cash used in operating activities stood at $5.2 million for the reported quarter, in comparison to $1.4 million reported in the same quarter of the previous year. This increase was attributed mainly to timing of payments to vendors.

The report shows that the company's Balance Sheet is strong. Also, over the last few years, the company has consistently grown its cash reserves while also maintaining zero debt for the reported quarter.

Valuation

Exponent has a current P/E ratio of 25.63, which indicates that the company is trading at a premium in comparison to the S&P 500 average of 19.10 but at a discount when compared to the Professional Services industry average of 34.24. The company's price-to-book ratio stands at 4.04, which shows a significant premium in comparison to the S&P 500 average of 2.43 but a significant discount in comparison to its industry average of 7.38.

Its current price-to-sales ratio stands at 3.00, which indicates it is below the industry average of 3.12 but well above the S&P 500 average. Exponent is trading at a discount in comparison to other investment alternatives in the Professional Services industry.

Conclusion

From the company's financial report for the first quarter of fiscal 2013, it is evident that the gross profit margin for the quarter is essentially unchanged in comparison to the same quarter of the previous fiscal year. Although the company recorded an increase in sales, there was a decline in net income for the reported quarter.

Exponent reported an increase in the company's liquidity, in comparison to the same quarter the previous year. With a Quick Ratio of 4.47, it is an indication that the company is extremely liquid. This shows that the company has the ability to cover any short-term cash needs that might arise in the future. Also, stockholders' equity increased by 9.35% in comparison to the same quarter of the previous year. For me, Exponent Inc. is a Buy.

Source: Exponent, Inc. - An Extremely Liquid Company Operating In A Fragmented Market