Navigant: Navigating Complexity

04/20/2015 8:00 am EST

Focus: STOCKS

Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

The latest addition to our Master Buy List is a global firm that specializes in providing consulting services to clients facing transformational change and significant regulatory and legal issues, as well as those that operate in highly complex market and regulatory environments, explains Taesik Yoon, editor of Forbes Investor

In the business world you sometimes have to sacrifice the present in order to set yourself up for a healthy future. 

For Navigant Consulting (NCI), this sacrifice has come in the form of lower profit margins over the past year, resulting from higher operating expenses associated with increased investments made to position the company for strong, sustainable growth ahead. 

The consequence of these actions was NCI’s first earnings decline in three years and a 20% drop in its stock price in 2014. On the surface, NCI’s guidance for the current year suggests more of the same. 

But buried in this outlook is the expectation that the company will finally begin to see meaningful benefits from its higher investment activity. 

While these benefits will initially only favor the top-line, we think a recovery in profits and its stock price won’t be too far behind. But as its investments begin to payoff, they should have a positive impact on NCI’s operations. 

We think this will allow NCI to get the most out of the positive demand environment it sees in key markets. 

For example, reimbursement pressures stemming from increasing complexities in coding and billing are likely to drive further demand for its cost-minimizing business process management services from the healthcare market. 

In energy, the need to replace/upgrade the aging domestic grid infrastructure and the EPA’s Clean Power Plan should result in greater demand for NCI’s consulting services.

The key actions taken by the company in 2014, and expected to be implemented this year, are designed to position NCI for sustainable and predictable organic growth over the longer-term. 

Thus, as the current pace of spending begins to decline, earnings growth should become much more aligned with growth in the top-line.  As this occurs, we think shares of NCI will enjoy a meaningful rebound from their currently depressed levels.

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