Helping Companies Hang On

06/23/2009 10:50 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says an outsourcing and benefits consulting firm provides essential services and has held up well in the recession.

Hewitt Associates (NYSE: HEW) provides outsourcing and consulting services. The company has more than 3,000 clients worldwide including many of the largest corporations. In fiscal 2008, 74% of revenues were generated within the US. The remaining 26% came from Europe, Canada, Asia Pacific, and Latin America.

The company’s benefit outsourcing segment produced 51% of first-half fiscal 2009 revenues. This segment provides various services, including administration of defined-benefit, defined-contribution, and health and welfare plans.

Human resource business process outsourcing (HRBPO) produced 16% of revenues. Talent management services include recruitment, training, performance evaluation, and succession planning. Workforce management services cover compensation administration, records management, relocation services, leave and absence management, travel, and execution of layoffs when necessary. Core process management services include payroll administration, benefits, and corporate level financial transactions.

Consulting accounted for the remaining 33% of revenues. HEW offers a myriad of consulting services including retirement planning, actuarial analysis, asset allocation, investment manager evaluation, designing cost-effective employee health care plans, and providing advice on acquiring, managing, and compensating employees and managers. Corporations also rely on HEW’s advice for mergers, acquisitions, and divestitures.

To a large extent, HEW’s revenues are a function of headcount at client organizations. Revenues can decline when clients institute layoffs, because fewer employees remain in corporate benefit programs. Furthermore, clients may scale back spending on consulting services during difficult economic times.

Despite severe recessionary pressures, HEW’s operations have held up well. Fiscal second-quarter revenues fell just 3.5% year over year to $761.8 million. Benefit outsourcing revenues increased 2.2% to $392 million, helped by the favorable resolution of a contract dispute. HRBPO revenues declined 14.9% to $119 million. Consulting services fell 6.7% to $243 million due to unfavorable foreign exchange. [But] the pro forma operating profit margin jumped to 13.07%, [while] pro forma net income soared 55.6% to $57.1 million, or 60 cents per share.

The recession continues to present a serious investment risk as client companies accelerate layoffs. On the other hand, barring bankruptcy, clients may decide to rely more on HEW’s consulting services. HEW also faces the risk of underestimating expenses associated with contracts, which would lead to lower-than-expected profitability.

Due to the recession, management currently expects a low- to mid-single-digit percentage revenue decline for fiscal 2009 [from fiscal 2008’s total], which is marginally worse than called for in previous guidance. Benefit outsourcing revenues should be flat, but HRBPO and consulting revenues are expected to fall.

Thanks to significant improvements in operations, [however,] profit margins for the full year should be stronger than initially projected. This is why management is sticking to its operating income guidance of $420 million to $435 million. (The stock closed below $30 Monday—Editor.)

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