Navigant Consulting: Charting a Path to a Higher Share Price

Includes: FCGI, NCI
by: Market Maverick

Firm Background
Navigant Consulting (NYSE:NCI) is a specialized consulting firm that provides risk management services. In other words, Navigant helps clients come up with a “game plan” to respond to events that might have a major impact on their business operations. Litigation and/or new regulations are two examples of events that could have a major impact on business operations.
Industry Background
I would never advise that you invest in a company or industry that you do not understand. Fortunately, the consulting industry is fairly simple to understand. Consulting firms provide advice to clients who lack the knowledge to help themselves. Why would a firm hire a consulting company instead of acquiring the knowledge or skills in-house? There are a variety of reasons, but for the most part firms hire consulting companies because they face issues that are far outside their core competencies.
For example, a firm that faces a lawsuit may decide to hire an experienced consulting firm to administer the lawsuit. Why? Because even if management hires in-house legal staff to handle a lawsuit it is difficult for management to provide direction on how to proceed because management is not experienced in this area. Think of it this way – if you were sued, you would probably hire a lawyer. You could choose to represent yourself and learn the law, but it is far easier to rely upon someone experienced in this area, isn’t it? Businesses operate in exactly the same way.
Generally, unless there is some ongoing need for risk management personnel, such as cigarette companies who are constantly sued, it is less hassle to hire a consulting firm to address an event that is outside management’s area of expertise.
Navigant’s Niche
Navigant specializes in providing legal support services and business consulting. Its main areas of business consulting are providing advice on SmartGrid initiatives, clean energy technology applications, and the impact of healthcare reform on business operations.
Why Navigant’s Current Stock Price Represents A Great Opportunity
Consulting companies generally trade at very rich P/E multiples. This may seem surprising to investors who are not familiar with the consulting industry because the nature of consulting is so cyclical. However, due to that cyclicality, when things are good they are great and when they are bad they are awful. Right now things in consulting are pretty bad – and this is precisely when you want to buy into consulting firms.
The Turn
Navigant’s management has acknowledged that business conditions for the firm are very tough. However, despite the current challenges management also expects Navigant to earn between 60 to 65 cents per share in 2010. Applying the lowest P/E multiple that Navigant has ever experienced (which occurred in 2003), one arrives at a worst-case valuation of $7.20 per share (60 cents x 12 P/E). As Navigant currently trades around $8.50 per share, the current share price represents a pretty attractive entry point. The current share price is only 18% above the $7.20 “doomsday” valuation.
The Opportunity
We all know the economy is going to recover at some point. We all know that Congress is not going to stop writing laws that impact the way companies do business. Finally, we all know that lawsuits are not going to stop anytime soon. Thus, I suggest we all know Navigant Consulting is going to perform better in the future.
How much better? Well, applying the lowest “high” P/E of 24 (which occurred in 2006), a conservative valuation for Navigant is $14.40 per share, or an increase of around 70% from today’s share price. I’m not suggesting this is going to happen overnight or anytime soon, but I am suggesting this is going to happen.
Keep in mind the $14.40 valuation doesn’t factor in any earnings growth. Thus, Navigant Consulting represents a pretty lucrative economic recovery play.

Author's Disclosure: Long NCI