FTI Consulting: A Fruitful Attempt To Becoming An Expert In Growth And Stability

Summary

• FTI Consulting, Inc. has shown gradual yet considerable and stable growth with ample cash inflows over the past decade.
• Despite being in operations for many years, it has not distributed dividend payments yet.
• The price moves in an upward pattern for the last three to four months, but the bearish remains apparent with potential overvaluation and moderate volatility.
• The company thwarted the adverse effects of the pandemic as its performance and financials remained stable.

Growth and stability FTI Consulting, Inc. (NYSE: FCN) remained manageable which continued even in the time of the pandemic. Revenues and income have been stable while liquidity and cash inflows remained adequate for its operations, financial obligations, and continuous expansion amidst the challenging and disruptive environment. Despite this dividend payments have not been paid yet while the stock price does not seem to agree yet with the considerable performance of the company as the bearish trend persists.

Company Financials

Operating Revenue and Operating Costs

FTI Consulting, Inc. has been operating in a wide range of consulting and management services from financial, legal, and economic to public relations, technology, and risk management. Since the mid-2000s, one can notice that the company has been capitalizing on growth through its continuous yet prudent acquisitions and increased operations and offerings. Despite being involved in the bankruptcies of two large firms, the company maintained a stable performance over the years as its services continued to expand.

The operating revenue of the company has increased gradually yet continuously over the years. In 2010, when it acquired FS Asia Advisory Limited Asia in Hong Kong, its activities in the region expanded. Also, we can observe that revenues have almost tripled in five years from about $500 million to $1.4 billion. Since then, growth has become slower but remained consistent and reasonable. In 2014, its revenues were already $1.77 billion which was also driven by acquiring TLG Partners which produced thought leader indexes. In 2018, it expanded further which drove its substantial increase already as it climbed up to $2.04 billion before further increasing by another $300 million, or 14% to $2.34 billion in 2019. Likewise, there was an uptrend in the operating costs, but the gap from the operating revenue remained wide as the movement has been more gradual at $500-$600 million in 2010-2017. In 2018 and 2019 growth became more apparent which showed that increased demand for its services and continuous expansion offset the associated costs with these as gross profit jumped to $700 million and $800 million, respectively. Nevertheless, the decreasing gross profit margin suggests that the company must still work hard to improve efficiency with its continuous increase in operating capacity to speed up growth.

In 2020, things remained stable for the company despite the unfavorable impact of a more challenging environment as the pandemic continued to disrupt the market. As problems in operations and financials arose, demand for the company's strategic management and services, particularly in the financial and economic segment rose substantially. With that, revenue in all quarters increased and accumulated to $2.46 billion which gave a $100-million, or 5% increase. But things did not get entirely better as direct costs increased by 7% and offset revenue growth and slowed down viability. Despite this, the core operations remained manageable with a gross profit of $790 million. Hence, it shows that amidst the unstable market and economic condition, the company was able to stabilize and synergize the operations and thwart or at least reduce the unfavorable effects of the pandemic.

Taken from MarketWatch

Taken from MarketWatch

Net Income

The other side of the core operations which corresponds to expenses on employees, sales and marketing, and research and development are the operating expenses. There were noticeable increases over the past decade primarily due to changes in compensation, especially in 2012-2013 and its more rapid expansion in 2018-2019. Although these had a downward impact on the gross profit, the values remained manageable so did the operating profit as it did not fall below $100 million except in 2012-2013, and generally increased from $160 million to $280 million in 2010-2019. Net income consistently followed the trend of the operating profit which shows consistency and maintained coordination between the core and non-core operations of the company. But because of lower values in 2012-2013 and increased taxes, net income dropped to -$36 million and -$11 million, respectively. But since 2014, recovery, adjustment, and continued success have been observed as net income rose consistently and more than tripled from $60 million to $217 million. Moreover, consistency and stability were proven in 2020, as the decrease, like in the core operations, was also manageable in net income as the value slightly staggered but remained high at $210 million. With that, one can tell that amidst uncertainties, the company remained unfazed with its stable core operations and maintained viability.

Taken from MarketWatch

Taken from MarketWatch

Liquidity and Growth

Except in 2011 at 1.55, the Current Ratio has always been about 2-3 which shows that liquidity has remained reasonable. And even if inventories would be excluded to come up with Quick Ratio, it would not fall below 1.4 which further verified its liquidity. In 2020, the Current Ratio and Quick Ratio decreased but remained acceptable to 1.68 at 1.55, acceptable, driven by the decrease in cash and cash equivalents due to increased share repurchases. This can be confirmed by checking the increase in treasury stocks. and a decrease in equity.

Moreover, the good liquidity of the company is further verified by its ample Free Cash Flows ("FCF") over the past decade. It has been less stable than net income, but the upward pattern has been apparent. In 2019, FCF amounted to $174 million with a decrease of more than $20 million due to its continuous expansion and investments. In 2020, as FCF rose further to $287, it should not be confusing despite the decreased net income and cash and cash equivalents. First, net income also accounts for non-cash items such as depreciation and amortization, disposal, and exceptional expenses while FCF focuses primarily on cash flows only. This shows that non-cash expenses in 2020 were higher which may be reasonable due to increased depreciation and amortization, and provisions and exceptional expenses due to the disruptive effects of the pandemic. Second, cash and cash equivalents, a Balance Sheet account are reported as of the period due to accumulation of value, unlike FCF which is accounted for as changes or movements of cash items. Also, the difference was due to increased share repurchases or treasury shares. With that, it can be seen that in all financial statements of the company, sound and stable fundamental health have been visible over the past decade. While growth has not been rapid, it remained reasonable and stable with adequate cash inflows for the company's overall operations.

Meanwhile, as discussed earlier, growth remained reasonable but not rapid. This can be proven by FCN's Return on Asset ("ROA") and Return on Equity ("ROE"). From 2010-2017, ROA has always been below the ideal level of 5% but has substantially increased in 2018 and 2019 to 6.3% and 7.9%, respectively. This proves that the swift increase in the company's expansion and acquisition sped up its growth. This growth can also be proven by the ROE wherein the acceptable ratio should be near 14% which is the average of the S&P 500. FCN's ROE jumped to 11% in 2018 and eventually reached the ideal level of 14% in 2019. In 2020, growth remained almost unchanged yet still acceptable as ROA slightly decreased to 7.6% but ROE rose to 15% due to lower equity, driven by higher share repurchases.

Taken from MarketWatch

Taken from MarketWatch

Taken from MarketWatch

What's in Store for the Investors?

Dividends Per Share

It's such a wonder why the company hasn't distributed or at least declared dividend payments despite being in trading for more than 10 years and in operations for almost 40 years. Also, FCF remained ample despite increased Capital Expenditures ("CapEx) and overall operations, especially in 2018-2019. The only thing that an outsider may think of is the company's continued prioritization of growth capitalization through acquisitions and expansion. This is true even at the height of the pandemic as it was able to increase its offerings in some of its operating segments, expand the operations, and acquire assets of Delta Partners. With that, despite the stable performance, one can't expect dividends anytime soon.

Stock Price

If we check the overall trend of the stock price in the last year or the last six months, the bearish trend is visible. It persists with moderate volatility despite the noticeably upward pattern for the last three to four months as it moved from $95 to $110. The upward momentum has become more visible since February 10 as it generally increased from $105.38 to the current price of $114.55. Despite this, the PE Ratio of 23.50 and PB Ratio of 2.88 do not agree with the recent price changes as these both convey overvaluation. On the contrary, the PEG Ratio of 0.84 suggests otherwise and adheres to the price increase for about two weeks. While this may increase hopes for a continuous increase and shift to a bull, one must remain skeptical as it still appears tricky, especially since volatility remains noticeable. Hence, watching the price closely for a few more days or even weeks while reading more company press releases and being more updated on economic and industry news are wise moves.

Potential Growth Catalysts

The Reopening of the Economy

Despite being stable amidst the disruptions at the height of the pandemic, the reopening of the economy remains a key for the company's more stable growth. As more companies will strive to get back on their feet once things get better, demand for services in financial and economic consulting, as well as restructuring, may rise dramatically. This is expected as the overall operations and finances of most companies may have to readjust after the pandemic. Also, the after-effect of the pandemic may not always be advantageous to other companies. Hence, it paves the way for the continuous increase in revenues and expansion and acquisition of FCN.

Conclusion

Growth has not been rapid but remained stable, sped up in 2018, and continued even at the height of the pandemic. With impressive revenues and income and adequate cash inflows, financial stability has always been guaranteed over the past decade, even in a more challenging environment. The company has more potential for further growth once the economy reopens. The only thing that may hold back an interested individual, especially a long-term investor is the non-payment of dividends. Meanwhile, the stock price remains tricky with apparent risks, given the contradictions of the three stock price models and a generally increasing pattern despite the bearish trend. The price may dip or rise further anytime soon although it may still appear high. Price volatility which gears more towards moderate and noticeable is another factor that one must consider for it may bring instant gains or decreases, especially for the short-term investors. Hence, investors may wish to keep an eye on the stocks of the company.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.