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Consulting firms see gains from economy's woes
By Sweta Singh
BANGALORE (Reuters) - As the nearly year-old credit crisis threatens to send the U.S. economy into a recession, a group of small- and medium-sized consulting firms see opportunity in other companies' troubles.
A spike in litigation, bankruptcies and investigations fueled by worsening credit and housing markets is expected to boost demand for advice on how to restructure loss-making businesses and counter regulatory and investor lawsuits.
"Consulting companies are benefiting from the economic turmoil, and we expect a lot more litigation to come out of the crisis in the financial services industry over the next nine months to a year," Stifel Nicolaus analyst James Janesky said.
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Shares of FTI Consulting Inc <FCN.N> and Navigant Consulting Inc <NCI.N> have gained in the past six months, and their higher-than-expected first-quarter earnings are drawing investor interest to this once-sleepy sector.
But not all consulting firms will reap the benefits right away, analysts say.
FTI is seen as an early beneficiary, thanks mainly to its large corporate restructuring practice. But competitor Huron Consulting Group Inc <HURN.O>, now seen as a laggard, would reap benefits later as companies seek its aid in dealing with investigations and lawsuits.
Janesky expects revenue for consulting firms to rise once the regulatory agencies, particularly at the federal level, accelerate their investigations.
TREND BUCKERS
The downturn in the economy has sent profits soaring for Baltimore-based FTI Consulting, one of the largest advisory firms in the United States.
"Every single segment saw growth in business because of something related to the credit crunch," FTI Chief Executive Jack Dunn told Reuters in an interview.
FTI's corporate finance and restructuring segment is the largest contributor to its total revenue.
Huron, set up by former employees of failed accounting firm Arthur Andersen LLP, is regarded by analysts as more sensitive than others to the changes in economy as it faces demand issues at its high-end accounting services segment.
JMP Securities' Kevane Wong has a "market perform" rating on Huron's stock, saying the company's economic sensitivity "is a cause of concern."
With Chicago-based Navigant, the problem could be the sustainability of utilization rate in the low to mid 80 percent range, analyst Janesky said.
Utilization, a measure of billable hours put in by consultants, is a key revenue driver for consulting firms. A higher utilization rate signals the firm is putting its resources to work.
Duff & Phelps <DUF.N>, a provider of independent financial advisory and investment banking services, reported a higher first-quarter profit, helped by increased demand for its advisory services due to market conditions.
"The global credit dislocation has created incremental opportunities for us," the company said in its earnings statement.
Larger private players like KPMG <KPMG.UL>, Deloitte & Touche <DLTE.UL>, Ernst & Young <ERNY.UL> and PricewaterhouseCoopers <PWC.UL> are also set to claim their share of the business generated by the economic crisis.
PWC, which derives 27 percent of its global revenue from financial consulting, said in terms of implementation it was far better prepared than its competitors.
"We are hiring aggressively," said Robin Roy, associate director of financial services, India.
GROWTH AND EXPANSION
Consulting firms are expanding by growing in emerging markets and broadening their domestic footprint.
Since January, FTI has made eight acquisitions and added about 445 employees.
Navigant has also acquired financial consultancy firms to strengthen its economic and financial advisory segment.
FTI has spent about $125 million on acquisitions so far this year, while Navigant has spent about $73 million.
Drew Fellows, KPMG's <KPMG.UL> head of financial services, European performance, said he sees growth in business coming from emerging markets.
CRA International Inc <CRAI.O>, however, is downsizing internationally because it is facing execution challenges, Stifel Nicolaus's Janesky said.
"We are in the process of divesting or shutting down the majority of our Australian and New Zealand-based operations," CRA's Chief Executive James Burrows had said in the company's first-quarter earnings filing with the U.S. Securities and Exchange Commission.
FTI Consulting, which attributed about 10 percent of its first-quarter revenue to the liquidity crisis, said it continued to look at acquisition opportunities.
"We have $150 million on credit line, $150 million of cash, and we use our stock as part of acquisitions," CEO Dunn said. "We are anxious to continue our acquisition plan."
FTI said it did not see any problem in sustaining the large number of employees it is integrating through acquisitions, even if revenue slowed down.
Janesky does not expect a slowdown in consulting revenue in 2008 or early 2009.
Shares of FTI have risen more than 65 percent in the past year, while those of Navigant have seen a 56 percent surge since January.
Huron, still waiting for the benefits of the downturn, has seen its stock fall 32 percent in the last six months, compared with a 1 percent fall in the Dow Jones U.S. Business Support Services Index <.DJUSIV>.
(Editing by Anil D'Silva)