It’s been a tough year for consulting firms with many of their corporate clients hesitant to commit to large engagements amid the uncertain U.S. regulatory environment, notes growth stock expert Taesik Yoon, editor of Forbes Investor.
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One company that’s been especially hard hit is Navigant Consulting (NCI), whose shares tumbled after reporting weaker-than-expected Q2 results and lowering its full-year guidance in late July due to these very factors.
NCI provides specialized services for clients facing transformational change and significant regulatory and legal issues, as well as those that operate in highly complex market and regulatory environments.
Due to an unfavorable business mix and the decision to maintain excess personnel, the adjusted operating margin (excludes amortization, severance expense and other special items) shrank 356 basis points to 9.08%. As a result, adjusted net income dropped 28.9% to $11.5 million or 24 cents per share.
Worst yet, the bottom line came in 9 cents below the consensus estimate and represented the company’s first earnings miss in 13 quarters. The biggest reason for the poor Q2 showing was the significant weakness in NCI’s Financial Services Advisory & Compliance segment.
In particular, the company saw a stark decrease in customer buying activity for compliant services related to consumer finance services regulation, which it believes was driven by the weariness of constant regulatory change and the uncertainty surrounding the legislative and regulatory environment in the U.S.
This has made NCI’s financial services customers less willing to commit to large, transformational projects, resulting in market opportunities being smaller in size and scope compared to prior years.
We also want to note that a key reason why profit margins shrank so much in Q2 is because NCI purposely chose to preserve unused resources and carry excess personnel to ensure it has the capabilities to handle the higher volume of work anticipated in the second half.
Thus, while we understand why the regulatory uncertainty may keep some investors at bay, it simply does not justify the steep 43% tumble the stock has endured so far this year.
More importantly, given such a fall from grace, the upside in NCI’s stock is likely to be significant if the company delivers on the growth for the second half still implicit in its guidance as we expect.
In fact, driven by the emergence of several significant financial crimes-related opportunities in its latest quarter, this guidance still implies that the company’s expectation for double-digit earnings growth in the back half of 2017 remains largely unchanged. Thus, once this begins to materialize, we think a rebound in NCI’s stock will quickly follow.
