Why I'm Adding to Huron Consulting

Remember when you were a kid in the doctors office and there were those issues of Highlights Magazine? Remember Goofus and Gallant? Well Huron Consulting (HURN) is Goofus. I've bought a paired trade of Huron Consulting and FTI Consulting (FCN) last year as a play on the coming restructurings in corporate America. [Nov 27: 2 New Recession Plays] FTI Consulting had the higher valuation but for a reason - it executes - it is Gallant. [Feb 28: FTI Consulting Continues to Prove to Be Best of Breed] Huron? Since I've owned it, it's warned twice.

Thankfully, I am not HolderMark but TraderMark, and by trading around this position I've lived to see another day. My original purchases in this name were in the $60s, but as the chart shows after a brief fling with glory it's been mostly downside. The last batch I bought near $50 in late February I've already released into the fire and was sitting this with a 0.10% position. So with  the warning, and stock down 30% ,I am buying back some exposure. Revenue was guided down but not by a huge amount; however earnings guidance really degraded.

Now, normally companies that execute this poorly (you cannot put a price on reliable management) I simply abandon ship, but I do believe in this thesis, and there are limited ways to play it. But Goofus and Gallant show why stock investing is so tricky - Huron is the "value" play, much cheaper (even before today's destruction) while its peer FTI is "expensive" and gets more so every month. So do you pay up for quality and consistency? Or take the "value". A quandry,but many times, it pays off to pay up... and this is yet another example. Now again, since I am willing to trade around positions I can live with the situation, especially since I've been relatively fortunate in my timing with this name, but for a traditional buy and hold investors this holding is an unmitigated disaster despite its "cheap value" relative to peer.

Today, I've increased my exposure in Huron Consulting (HURN) from 0.1% to 1.7% of fund, in the $40-$41 range. Frankly the chart is so busted I have no support anywhere - these are lows not seen for 2 years. So I simply let the market do its thing the first 20-25 minutes and then began scaling in - certainly the stock can go lower and without any clear chart support I did not buy a larger stake. But at these prices the valuations are low, even if they miss next quarter again (which appears to be their operating model). Hopefully 2009 will be the year for them to benefit for the original reason I bought these 2 names....

• Huron Consulting Group Inc., which provides financial and operational advice to businesses, on Thursday reduced its first-quarter guidance, citing continued weakness in its financial consulting segment.
• For the quarter ending March 31, the company anticipates earnings between 50 cents and 57 cents per share, compared with previously issued guidance of 66 cents to 70 cents per share. Analysts polled by Thomson Financial, on average, expect earnings of 67 cents per share.
• Huron estimates revenue before reimbursable expenses to be in a range of $138 million to $140 million. The company originally forecast first-quarter revenue between $142 million and $147 million. Analysts, on average, estimate revenue of about $145 million.
• "While we are disappointed in the results of our financial consulting segment in the first quarter, we remain optimistic that this segment will regain momentum," said Gary E. Holdren, chairman and chief executive, in a release. "The continuing turmoil in the financial markets should translate into an increasing level of investigations and litigation over the next 12 to 18 months."
• Huron said its outlook for the year still includes double-digit organic revenue growth.

Disclosure: Long Huron Consulting in fund and personal account

Comments

[Nick Adams:]

Huron is a $15 stock. Even its current valuation relies heavily on almost impossible growth. Consulting firms just don't continue to grow at such a fast rate. It is very different to double your size when you are 200 consultants; it is another when you are 1000. Furthermore, Huron is a not a restrucuting play. This a is a small part of their business. They are a litigation support firm with a few other niche practices.

2008 Mar 28 08:41 AM

[Dan Jacome:]

Not seeing much of a bounce today, would take the + 1 you got and move on

2008 Mar 28 01:29 PM

[TraderMark:]

I think it can get back to $50 within 3-4 months. 25% in this market is not bad. Trading at half of FTI Consulting valuation at this point. Granted it deserves to trade at a huge discount :)

Nick correct, restructuring is not a big part of their business or as big as say a FCN or even NCI. But we have litigation, financial consulting etc - and with the mess we are in it should still help them. I do agree much easier to grow if you are smaller but now at this point we are talking 14 PE on 08. Not terribly expensive. Accenture is a different form of consulting and still solidly growing... much larger.

2008 Mar 28 02:55 PM

[Nick Adams:]

Mark, to be clear, what Huron calls financial consulting is purely litigation support. Furthermore, much of the litigation work that they do is driven by the DOJ, and would not be sensitive to a downturn in the economy.

I don't think that Accenture can provide an accurate comparison. First, over 1/3 of Accenture's business is BP outsourcing. Second, it is much easier to grow when your project teams are measured in the hundreds. Accenture has more consultants ar their largest clients than Huron has total consultants. The nature of Huron's work will never allow for this.

2008 Apr 01 11:21 AM

[TraderMark:]

Thanks Nick. Good points all. But I think there is still opportunity here and in fact added to my position today. I still think $50+ is very doable as I stated above, and from $40-$41 that is a nice return. They did make a recent acquisition (smaller) in the restructuring field trying to broaden their business. Again not my favorite name but its valuation compared to FCN or NCI is compelling at these levels.

2008 Apr 01 01:42 PM