Headhunter Seeks More Growth

03/26/2007 12:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Ticker symbol KFY

Richard Moroney, editor of Upside, says international executive-search firm Korn/Ferry International has lots of growth potential as demand grows for management talent around the world.

Korn/Ferry International (NYSE: KFY; $23) is capitalizing on robust demand for corporate managers. The executive-search concern delivered a 22% per-share profit gain on 24% sales growth for the six months ended October, and near-term results should benefit from continued volume and pricing growth. The stock, still reasonably valued at 17 times expected year-ahead earnings, represents a Best Buy.

A leading worldwide executive search firm, Korn/Ferry provides executive recruitment, executive coaching and middle-management recruitment. Korn/Ferry operates through 70 offices in 40 countries, maintaining what it believes is the broadest global presence in executive recruiting. About one-half of revenues come from outside the US.

Korn/Ferry is distinguished from other executive search firms by its focus on high-end assignments. Over 50% of its executive searches last year were for board level, CEO, or senior executive positions. Korn/Ferry conducted more than 6,200 executive searches last year and experienced growth across every major geographic region. Broad-based growth continued in the six months ended October, with executive-recruitment revenue up 25% in North America, 31% in the Asia-Pacific region, 22% in Europe, and 20% in South America.

Total fee revenue rose 24% during the six months ended October, reflecting 24% growth in the number of engagements billed and higher average recruiting fees. Per-share earnings jumped 22%. (Korn/Ferry reported earnings for the January quarter of $0.33 per share, within management's guidance, while revenues rose a better-than-expected 27% on strong fee income--Editor.)

To sustain growth, the company plans to gain market share and capitalize on cross-selling opportunities. For example, the FutureStep subsidiary sells middle-management recruiting services to Korn/Ferry's executive-recruitment clients. FutureStep, with 12 consecutive quarters of revenue growth, is benefiting from a new technology platform and last year's addition of 125 new staffers.

Korn/Ferry recently began offering leadership-development, executive-compensation, and human resources consulting. The August acquisition of Lominger Limited added new offerings in leadership development.

The outlook for the global recruiting market remains favorable. The US economy has produced 35 consecutive months of job growth, bringing unemployment down to 4.6%. Rapid economic growth in China and India is fueling strong demand for executive talent. In Europe, an aging workforce is creating strong demand for executives.

Korn/Ferry operates in a cyclical industry, but consensus expectations of 15% annualized growth in per share earnings over the next five years appear achievable. With cash of more than $5.00 per share and strong free cash flow, Korn/Ferry has ample resources for share repurchases, acquisitions, and continued expansion. At 17x expected year-ahead earnings, the stock trades in line with its peers and at a modest premium to its three-year average. Considering Korn/Ferry's cash position and operating momentum, the stock represents an attractive value.

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