Huron Consulting Group Faces a Challenging Situation

| About: Huron Consulting (HURN)

2008 is turning out to be a difficult year for buy and hold investors. In order to realize profits and maintain a healthy risk profile, a certain amount of flexibility is required. The year seems to have a way of turning some attractive situations into losing prospects as economic dynamics continue to shift.

One such investment opportunity is Huron Consulting Group (NASDAQ:HURN). The company was profiled on this site in October as being a strong growth company with a bright future. However because much of its business comes from the financial sector, many clients have been at the cusp of the prevailing economic hardships. The stock has responded in kind dropping as much as 50% as investors realized that the growth level would likely contract.

This week management had a presentation at the William Blair Growth Stock conference in Chicago. Management acknowledged the weakness in their financial segment and yet claimed that the other business segments (higher education, health care, document review and corporate consulting services) were still experiencing robust growth.

The plan at this time is that the company will reduce headcount in the financial area at the end of June although it has not laid out any specifics in regard to a reduction in staffing. The expectation is that the company would be able to meet guidance without the layoffs but it is going to cut the costs in order to bring EPS growth to a higher level.

In the end, William Blair is still modeling 25% or stronger second half growth in the health care and higher education segments and expects the weakness in the financial sector to moderate. In 2009, the estimate is for 20% growth in non-financial segments and flat revenue in the financial segment. The focus of this segment is expected to change from working in the credit markets to a broader “demand drivers” including international arbitration, financial re-statements, and convergence of international accounting standards. One concern might be that the firm has less experience in these niches and may find it difficult to compete in this field.

While the stock has added 25% from its spring low, I am becoming increasingly fearful that we could see it trade back down and possibly break the low point from March. The discussion surrounding the company has become increasingly positive and yet seems to ignore the more difficult environment that is spreading to other parts of the economy. As unemployment picks up and the fed contemplates tightening in order to fight inflation, the potential for broad weakness is becoming more of a reality.

If growth expectations for HURN are called into question or one of its other business lines experiences less than stellar growth, one can expect holders of the stock to hit the exits quickly, driving down the share price. I would exercise caution in this name and even look for opportunities to build short positions with disciplined risk controls.

HURN Notes

Disclosure: Author does not have a position in HURN.