Navigant: An Out of Favor Gem

Includes: ACN, NCI
by: Charlie Anderson

During the course of the business cycle certain industries, and certain companies within those industries, fall out of favor. Navigant Consulting (NYSE:NCI) is currently one of those companies.

The recession has weighed heavily on the consulting industry, including Navigant. Despite this, Navigant has identified some areas for expansion and has repositioned itself within the industry. Navigant's only advantage over its competitors is size. It is one of the few national consulting firms in the United States with offices around the country. This, along with its depth of knowledge, has given Navigant some competitive advantage, at least over newcomers to the field. While other companies, particularly Accenture (NYSE:ACN), are larger, Navigant has client relationships that are difficult for competitors to break.

Navigant is growing primarily through acquisitions, and thus has a significant amount of goodwill ($526 million, or 63% of assets). There is no concrete evidence in any of the company's documents that these acquisitions have been good investments. Navigant is in decent financial health. They have interest rate swaps that lock in a majority of their debt at around a 5.3% rate. They recently used cash to pay down around 10% of their debt. Consistent cash flow makes me confident that the company will be able to pay off future debt.

Navigant divides its consulting into four segments: Dispute and Investigative, Business, International, and Economic.

Dispute and Investigative consulting accounts for about 40% of revenue, and is doing pretty well. Revenue has been down, but it is performing slightly better than the overall company.

Business consulting accounts for about 40% of revenue, and is mostly comprised of healthcare consulting. Management thinks that the new regulatory environment in the healthcare sector will lead to steady demand.

International consulting is a much smaller segment, at around 10% of overall revenue. "International consulting," unlike all the other segments, isn't defined by substance. This is simply dispute, investigative and business consulting that Navigant does outside of the United States. The three countries of operation are the United Kingdom, Canada and China.

Economic consulting is a big growth area for Navigant. Currently around 10% of revenue, the average bill rate is 40% above the company average. Revenue per consultant is also 40% above the company average. Since the creation of this segment in 2008 as part of the acquisition of Chicago Partners, revenue has doubled. This is primarily due to all of the litigation that has stemmed from the financial crisis and the resulting new regulation.

Besides healthcare and litigation, management has identified one other growth area: Energy. Navigant considers itself well-positioned to profit from the stimulus spending and new interest in green energy.

If Navigant were to return to its 10-year average valuation, the price would double. It is also cheap from a longer-term technical perspective. This is a great multi-year investment.

Disclosure: I am long NCI.

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