Operating 100 offices in 55 countries, Korn Ferry (KFY) places executives and advices boards on strategic decisions, making it an indispensable partner where 90% of annual billings constitute repeat business, asserts Adam Johnson, growth stock expert and editor of Bullseye Brief.
The company is a best-in-breed operator trading at the low end of historic valuation, despite strong cash flow and low debt. KFY’s signature business of helping organizations recruit C-suite executives, board members, and senior managers.
Revenues rose 40% in FY 2022 to a new a record high of $2.8 billion, driven by the company’s unique and proprietary approach to data-informed decisions.
While executive search accounts for the over half firm-wide revenue, management consulting services and data analytics are increasingly playing a bigger role in profitability, widening the moat around KFY’s value-added services to clients.
Korn Ferry clients are incredibly loyal, with 90% returning year after year and 70% consuming more than one service, from multiple searches to additional consulting and/or analytics services.
Despite record revenue growth and profitability in fiscal year 2022, KFY shares trade at their cheapest valuation in ten years… less than ten times earnings. Historically, KFY has traded at 15.3 times forward earnings, and twice since 2018 valuation has spiked above 30x.
What is the stock worth? I think a lot more than less than 10 times earnings. In my base case valuation scenario, I multiply current consensus eps estimates of $5.13 for 2023 by the 10-year average multiple of 15.3x, which implies a target of $78.
Since this level of earnings implies a 15% decline vs 2022, I think my base case is quite conservative. For my my bull case, I effectively hold eps steady above $6, and assign a higher multiple of 18x, more in line with where I think the market will trade.
This combination implies a target of $108. In my bear case, I allow for a profit decline of 20% YoY and slash the multiple to just 8x, implying a target of $38. Averaging these together and giving higher weighting to my more bullish scenarios, I arrive at $83.
Anticipating recession, investors have sold shares from all-time highs to their cheapest valuation in ten years. Korn Ferry is a world-class franchise offering considerable value, especially if the economy avoids recession as I believe it will.
