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Huron Consulting (HURN) held their Q2 2009 conference call yesterday. This is the company that tanked 70% in a day after revealing some fishy "sharing" of money among acquisition employees.

I pointed out back then (but admittedly didn't pull the trigger) that with the stock off so much, it may have overshot to the downside:

With shares down 70% this morning, a LOT of bad news has been discounted. Opportunity in the shares?

There were multiple street downgrades of the stock so far this morning, mainly related to the company's reputation being damaged by the restatement. If you believe management, then the "sharing" of acquisition cash among employees at acquired companies might not be a reason for the shares to be down so much. The SEC inquiry, and possible consultant departures could be a bigger problem, however. There could be some value here, if the 70% drop in the stock has overshot the coming reductions in earnings...

Late Monday, the company announced second quarter earnings that were basically in line with the reduced guidance they provided a few weeks ago.

More important was that revenue guidance for the full year remained intact, an impressive feat with the turmoil caused by the accounting restatement and potential damage to the company's reputation.

From yesterday's call:

  • Health and education consulting remains the strong point, boosted by stimulus dollars for projects including university research.
  • Accounting, finance will be weak, more tied to discretionary expenditures by clients in a weak spending environment.

And then, among the more important topics, the issue of employee retention and client worries:

  • While the company knows employees are being targeted by other firms, they have not lost a single managing director (or lower level consultant) to a competitor.
  • While certain clients expressed concern about "continuity of service" due to the disruptive nature of the accounting restatement, a total of ONE client canceled a project, and another 3-5 are awaiting more details, just out of an abundance of caution.

So, one cancellation and 3-5 concerned clients, out of 700 active total clients. Not fun of course, but compare that 1% "impairment" to the client base, compared to the huge drop in the stock price.

Also on yesterday's call, management said that they remain safely in compliance with all debt covenants, and they feel safe about remaining in compliance even when this accounting fiasco results in a writedown of goodwill (why do lenders involve goodwill in their debt covenants?!).

Other risks

  • University endowments are suffering massively, and that could result in cuts to their spending on consultants.
  • SEC investigation to hourly billing is ongoing, and could be a further negative drag on shares.
  • Employee departures are a very real risk, especially considering the dramatic decline of employee's stock options, given the drop in the stock price.

Huron shares are trading today at 20.00, about 46% above the level I flagged them as oversold. Alas, I never bought shares! This is an example of watching for an over-reaction in shares. In this case, the shares fell more than the company's earnings prospects, presenting a (RISKY) opportunity for upside. How to control that risk? Limit the position (had you invested) to a small percentage of your portfolio.

Source: Update on the Huron Situation