Korn Ferry Stock: Attractive Risk to Reward Consulting Fans (NYSE:KFY)


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For almost every business in almost every market, talent is the most vital resource. Without it, businesses will struggle to keep up with the competition. At the end of the day, they may even die as a result. After all, the right decisions needed to enable an organization can only thrive through talented individuals. It is therefore not surprising that a large number of companies have grown over time and are dedicated to providing this talent, in one way or another, to corporate clients. Such a company is Korn ferry (NYSE: KFY). In recent years, this company has enjoyed generally attractive financial performance. For the most part, income has grown year over year, with only the pandemic negatively affecting it. Profitability also followed suit. Compared to similar companies, the company’s shares are trading near the low end of the spectrum. If the current performance indicates a new normal for the company, the company could ultimately also be considered cheap on an absolute basis. Meanwhile, if performance returns to what the company has seen in previous years, the worst-case scenario is likely that the company is seen as having a fair price. This creates a scenario where, more likely than not, the downside would be a business that only drops modestly in price, while the upside could be quite attractive.

A talent-focused company

Today Korn Ferry works like a global consulting firm that helps optimize the strategy, operations and talents of its clients. Operationally, the company is also very diverse, with seven different segments it manages. These segments are further grouped into four different business segments for the company. The first of these is the Consulting activity. Through this, the company helps organizations align their structure, culture, performance and people, with the aim of addressing organizational strategy, evaluation and succession, leadership and professional development, and total rewards. Ultimately, it’s really about helping businesses run more efficiently with the advice that Korn Ferry can offer. This line of business, which is also its own independent segment, was responsible for 31.3% of the company’s revenue and 22.3% of its profits in 2021.

Then we have the digital business line, which is also its own independent segment. Through this, the company uses artificial intelligence, along with machine learning, to identify resources that help improve operations in businesses. The company’s proprietary system combines its own data, along with external customer and market data, to generate actionable insights and recommendations. Last year, this segment only generated 15.8% of turnover. But he was responsible for an impressive 23.6% of profits. Then we have the RPO and Professional Search business line, which is also its own independent segment. Through this, the company matches talented people with intellectual property to provide its clients with enterprise talent acquisition solutions. These can range from finding a specific candidate to entire departments or teams. It also includes the company’s global outsourcing recruitment solutions. Last year, this segment accounted for 20.7% of the company’s revenue and 19% of its profits.

The final business segment, which includes the remaining four segments of the business, is called Executive Search. Through this, the company helps organizations recruit talent at the board, CEO and other senior and general management levels. They do this by combining interviews, other types of assessments, etc. The largest of these segments in this line of business is its North American unit. Naturally, this encompasses all executive search functions in North America. Last year, this segment was responsible for 21.9% of the company’s revenue and 26.9% of its profits. Next, we had the EMEA (Europe, Middle East and Africa) segment, which accounted for 7.6% of revenue and 3.2% of profit. The Asia-Pacific segment accounted for 4.6% of sales and 4.6% of profits last year. And finally, the Latin America segment was responsible for 1% of sales and 0.4% of profits.

Historical financial data

Author – SEC EDGAR Data

Over the past few years, the company’s fundamental performance has been generally positive year after year. Revenues fell from $1.62 billion in 2017 to $1.98 billion in 2020. Then, in 2021, the pandemic caused the company’s sales to drop to $1.82 billion. If this timing seems off to you, just remember that Korn Ferry has a financial year ending on April 30 each year. Much of the pain experience in 2020 would have impacted the business in its 2021 fiscal year. Since then, the business has shown fine signs of recovery. In the first nine months of its 2022 financial year, sales reached an impressive $1.92 billion. This implies a year-over-year growth rate of 51.8% from the $1.26 billion generated a year earlier. Based on current guidance for the last quarter of the year, management expects revenue to reach $2.60 billion in 2022. That would be 42.7% more than the company has generated in 2021.

Historical financial data

Author – SEC EDGAR Data

Over the years, the management has also done well to increase the company’s profitability. Between 2017 and 2021, for example, net income increased from $84.2 million to $114.5 million. Other profitability metrics were also generally positive. Between 2017 and 2019, for example, operating cash flow increased from $106.1 million to $258.8 million. In 2020, cash flow fell to $236.3 million before jumping to $251.4 million last year. The group’s only black sheep, however, has been EBITDA. After rising from $183.7 million in 2017 to $274.1 million in 2019, it began a steady descent to finally hit $216.5 million last year.

For the company’s first nine months of fiscal 2022, net income reached $234.7 million. That compares to $48.3 million generated a year earlier. Cash flow from operations, meanwhile, jumped from $54.3 million in the first nine months of its 2021 fiscal year to $221.5 million now. Even EBITDA saw a nice rebound, rising from $141.5 million to $375.4 million. For the full year 2022, management expects net income of approximately $316 million. No indication was given regarding the other profitability parameters. But if we annualize them based on results for the first nine months of the fiscal year, operating cash flow could reach $693.8 million, while EBITDA should be lower at $574.4 million. . To be clear, these numbers would represent a significant deviation from historical performance. But given the company’s performance so far for 2022, that’s not out of the question. When in doubt, however, investors should err on the side of caution.

Trading multiples

Author – SEC EDGAR Data

By taking all of this data, we can then price the business. Using our 2021 results, the shares are trading at a rather high price for an earnings multiple of 29.2. However, using other measures of profitability, stocks look considerably more affordable. The price/operating cash flow approach would give us a multiple of 13.3. And the EV to EBITDA approach would yield a multiple of 13. If instead we assume that 2022 forecast results represent the new normal, those multiples would be significantly lower at 10.6, 4.8, and 4.9 , respectively. To put it all into perspective, I decided to compare the company’s 2021 results to the results of five similar companies. Using the price/earnings approach, these companies ranged from a low of 12 to a high of 41.6. Two of the companies were cheaper than Korn Ferry. Using the price/operating cash flow approach and the EV/EBITDA approach, the ranges were 8.6 to 245.6 and 7.3 to 30.8, respectively. In both of these scenarios, only one of the companies was cheaper than our prospect.

Company Prizes / Earnings Price / Operating Cash EV / EBITDA
Korn ferry 29.2 13.3 13.0
51job (JOBS) 41.6 N / A 30.8
Upward Work (UPWK) N / A 245.6 N / A
Insperity (DK) 33.1 15.8 18.5
ManpowerGroup (MAN) 12.0 8.6 7.3
Kforce (KFRC) 19.8 20.3 13.8

Take away

Based on the data provided, Korn Ferry appears to be a solid company that is enjoying a bargain. It is unclear to what extent current market conditions will impact the business. However, even if the results return to what the company experienced in 2021, I don’t think the company’s stock is likely to be considered overpriced. In this case, the company would likely be closer to fair value. In the meantime, if things go well, the upside could be quite attractive. This clearly makes it a favorable risk to reward opportunity at this time.


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