CRA International Moat Check Comes Up Empty

Continuing my review of potential wide moat companies from a screen I ran last month, today I’m going to look at CRA International Inc. (CRAI). CRA International use to go by the name of Charles River Associates until May of 2005. CRA International is an economic, financial, and business consulting firm. They are highly involved in supporting merger and acquisition activity, business strategy, and litigation support.

Justin at Rule One Investment Community produced a nice overview of CRA International’s Big Five Numbers. The numbers look good. Return on invested capital [ROIC] exceeded 10 percent each year since 1996. However, ROIC has dropped to 8.7 percent for the past twelve months. Equity, earnings, sales, and cash flows have all been strong. The numbers seem to indicate that CRA International has been consistently performing well in their industry.

My main concern is that it is very difficult to develop a wide moat in consulting since the company’s assets walk out the door every day. CRA International’s most important asset is their people. The company’s competitive strengths come from its highly educated and experienced staff, its reputation for high-quality consulting, and access to leading academic and industry experts.

In addition, CRA International considers its demonstrated success with acquisitions to be a competitive advantage. The company has made 11 acquisitions since 1998. This actually raises a red flag for me. I’d rather see a company grow organically than through acquisitions.

I might be missing something here, especially considering CRA International’s past performance, but I don’t see a wide moat here. Competitors such as LECG (XPRT), Bain, or McKinsey can hire away key personnel (referred to as rain makers in the consulting sector) from CRA International and effectively acquire customers this way. Employee retention of senior firm members is critical in this business. I do not see any particular special mechanism in place at CRA International to minimize the impact of turnover. I need to see proprietary systems, databases, or other products separate from the services of the individual staff members' expertise at a consulting firm if I’m going to consider them having a wide moat.

I feel like I’m missing something here, so I welcome your feedback below in the comments section. For now I’m going to put CRA International on my pass pile and move on to the next company.

CRAI 1-yr chart:

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