Research Intensive Investing

Korn Ferry, Monster, Heidrick & Struggles: Recession Risk Not Priced In

Hi Dave,

Thanks for the comments. In response:

1) Though the stocks have already been hit hard, this is not much unlike the trend that occurred in 2000-2001; these stocks get marked down in 2 stages. The first (which has already occurs) happens when the market stops treating them a growth stories and begins to have more of a flattish outlook. The 2nd stage occurs when the businesses show clear signs of cylicality, and operating performance falls. Check my prior write-up on KFY why for I think there is still more room for these to fall.

2) This is a long debate, but I will say that the fed's impact has been negligible so far (LIBOR spreads have continued to increase, etc.), and that there are many arguments put forth by many smart people supporting serious recession risks.

3) I'm glad you brought this up. On an income basis, it gets ~ 61% from North America. Also, most of its international exposure is to multi-nationals, which have relatively greater exposure to the US than local companies (this is why in the last recession revenues and income abroad also dropped off a cliff, and will likely happen again this time around, though perhaps to a lesser extent).

4) The cash number is misleading. They have $112M in bonus payments due in Q1, and $15M they still have to pay for the Highland Partners acquisition, so lets say the current number is more like $150M. On top of that they are using most that money for buybacks, which are succeeding only to keep the share count basically flat, because of the generous share grants to employees. And they are also buying their stock on peak earnings, which in the long term I believe is destroying--not adding--shareholder value. Buybacks are not good when you are buying your own overvalued stock.

5) This will take some time to play out. But given HSII's sector concentration, I think its more likely than not that we'll see significant pressure in Q1 of next year, if not next quarter.