February 17, 2015 Navigant Consulting Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 08/15/2013 Current Price (02/16/15) $14.99 Target Price $16.00 52-Week High $18.98 52-Week Low $13.01 One-Year Return (%) -13.20 Beta 1.32 Average Daily Volume (sh) 258,188 Shares Outstanding (mil) 48 Market Capitalization ($mil) $727 Short Interest Ratio (days) 3.52 Institutional Ownership (%) 92 Insider Ownership (%) 2 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 5.0 Earnings Per Share (%) 13.4 Dividend (%) N/A using TTM EPS 14.7 using 2015 Estimate 15.6 using 2016 Estimate 13.6 Zacks Rank *: Short Term 1 3 months outlook 4 - Sell * Definition / Disclosure on last page (NCI-NYSE) SUMMARY Navigant reported solid fourth quarter results with adjusted earnings beating the Zacks Consensus Estimate by $0.08. Going forward, the company s strategy of inorganic expansion is likely to propel its growth momentum. Navigant is also restructuring its business in order to better align the capacity with demand and aims to diligently reduce its operating expenses to improve profitability. Navigant keeps its focus on corporate development efforts to build a very robust pipeline of investment opportunities which is inline with its growth strategy. However, stiff competition, currency fluctuations, and regulatory stringencies are likely to peg back its profitability to some extent. We maintain our long-term Neutral recommendation for the stock. Risk Level * Below Avg., Type of Stock Small-Value Industry Consulting Zacks Industry Rank * 57 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 215 A 213 A 212 A 205 A 845 A 2014 198 A 208 A 230 A 224 A 860 A 2015 205 E 206 E 213 E 214 E 838 E 2016 903 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.27 A $0.31 A $0.25 A $0.25 A $1.08 A 2014 $0.20 A $0.22 A $0.32 A $0.28 A $1.02 A 2015 $0.18 E $0.24 E $0.28 E $0.26 E $0.96 E 2016 $1.10 E Projected EPS Growth - Next 5 Years % 13 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Founded in 1983 and headquartered in Chicago, Illinois, Navigant Consulting Inc. is a provider of specialized consulting services. The company s staff of seasoned consultants and industry leaders provides litigation support and investigative services, claims management and analysis, corporate finance services, discovery services, government contracting services as well as operations advisory and management process outsourcing services. Navigant Consulting primarily focuses on customers in industries undergoing substantial regulatory and structural changes, including construction, energy, financial services and healthcare. The company went public in 2006. Navigant derives majority of its revenue before reimbursement from professional service fees. The company operates through four segments. In second-quarter 2012, Navigant modified its business segments to Disputes, Investigations & Economics, Financial, Risk & Compliance Advisory, Healthcare and Energy. Its previous segments were Business Consulting services, Dispute and Investigative Services, Economic Consulting and International Consulting. The Disputes, Investigations & Economics segment provides a wide range of services related to accounting, financial and economic analysis, as well as discovery support, data management, analytics and regulatory compliance. Its clientele consists of law firms, accounting firms, corporate boards and government agencies. The Financial, Risk & Compliance Advisory segment provides strategic, operational, valuation, risk management, investigative and compliance consulting services to clients. The clients are principally from the highly regulated financial services industry, including major financial and insurance institutions. This segment also provides anti-corruption and restructuring consulting to clients. The Healthcare segment provides strategic, operational, management and financial advisory services to health systems, physician practice groups, payers and life sciences companies. The Energy segment provides existing and prospective owners of energy supply and delivery assets with the ability to evaluate and enhance their entities. Its clientele consists of utilities, independent power producers, financial entities, law firms, regulators, and energy equipment providers. Equity Research NCI Page 2
REASONS TO BUY Opportunities associated with healthcare reform continue to drive demand as the industry seeks expertise to improve profitability and address increasing regulatory pressures for compliance. With the acquisition of EthosPartners Healthcare Management, Paragon Health and Easton Associates, Navigant is anticipated to achieve its operational goals and augment its opportunities associated with healthcare reform. The company aims to strengthen its healthcare business deep expertise in the regulated life sciences industry by extending its capabilities in business strategy development, opportunity assessment, R&D portfolio management, new business and new product planning. Additionally, the energy practice continues to benefit from demand for services related to energy efficiency, Smart Grid and renewable energy. The demand for data analytics in healthcare across all markets is also growing, given the access to new data as a result of the Affordable Care Act and new technologies. The company is presently developing data analytic tools across multiple groups to meet the growing demand for technology-enabled solutions that can help clients address many of the market challenges. Going forward, management identifies healthcare as key area for long-term growth and subsequently aims to sharpen its investment focus within these practices. Credit crisis work continues to drive sizable activity and has created further opportunities as the company combined the arm with the data analytics and technology solutions capabilities. Navigant s international business also continued its steady improvement. Additionally, the company is growing inorganically. Navigant acquired Cymetrix Corporation, an Irvine-based revenue cycle management firm specializing in providing outsourcing services to hospital healthcare networks. Cymetrix is expected to add significant depth to Navigant s subsidiary Alleviant, LLC, which presently provides physician revenue cycle outsourcing services. The new entity, Navigant Healthcare Cymetrix, is wellpoised to become a leading provider of end-to-end revenue cycle management services. Navigant aims to achieve its ongoing commitment to deliver the highest value of quality service for its clients; to leverage its prior investment actions to accelerate organic growth and to improve the profitability of its consulting practices while managing the compression from investing in and delivering large business process management services contracts. Management is taking steps to restructure the business in order to better align the capacity with demand. The company has efficiently managed its debt obligation. Utilizing its strong cash flow generation capacity, the company continues to return capital to its shareholders and making investments in technology, new capabilities and client channels. At the same time, Navigant keeps its focus on corporate development efforts during the year to build a very robust pipeline of investment opportunities which is in-line with its growth strategy. The company aims to use its strong cash position to complement its current high-demand businesses. All these measures augur well for the long-term growth. Equity Research NCI Page 3
REASONS TO SELL Navigant operates in a highly labor intensive sector. On the face of it, the sector should ideally employ and run with a perfectly skilled work force to track the ever-changing business environment. Since skilled workers are always in high demand, there remains a possibility of high attrition rate within the sector. On the other hand, training of unskilled workers increases operational costs, thereby affecting margins. The business service sector is highly fragmented, with no single service provider possessing dominant market share to rule the industry. Hence, Navigant faces stiff competition from a number of peers while acquiring and maintaining clients for its different business segments, which could further reduce its profitability. Navigant continues to face challenges on both the domestic and international fronts. This is primarily attributable to the difficulties in managing and staffing foreign operations, relatively limited new assignments, currency fluctuations and regulatory stringencies due to the uncertainty in the global economy. As such we are bearish on the stock to some extent. Navigant relies heavily on a group of senior-level consultants and business development professionals. The future success of the company is largely dependent on its ability to successfully recruit and retain its people. Competition for skilled consultants is intense and retention related issues are a continuous challenge for the company. The consulting industry has low barriers to entry and it s easier for consultants to start their own businesses. While hiring and retention of personnel are keys to driving revenues, full-time equivalent levels and related consultant compensation in excess of demand drive additional costs and can negatively impact the company s margins. RECENT NEWS Navigant Beats on Q4 Earnings & Revenue Estimates December 31, 2014 Navigant s adjusted EPS increased 12% to $0.28 in fourth quarter 2014 compared to $0.25 in the prioryear quarter. The adjusted earnings comfortably beat the Zacks Consensus Estimate of $0.20. The increase in earnings was driven by higher revenues. Adjusted EPS for full year 2014 was $1.02 compared to $1.06 for 2013. The adjusted earnings per share for full year beat the Zacks Consensus Estimate of $0.95. The company reported fourth-quarter 2014 net income from continuing operations of $12.3 million or $0.25 per share compared with $14.2 million or $0.28 per share in the prior-year quarter. For full year 2014, net loss from continuing operations was $36.9 million or $0.76 per share versus net income from continuing operations of $55.1 million, or $1.08 per share in 2013. Total revenue increased 9.0% year over year to $223.6 million, while revenues before reimbursements (RBR) improved 12.0% year over year to $199.5 million in the reported quarter. Reported revenues beat the Zacks Consensus Estimate of $197 million. In particular, the top line benefited from significant revenue gains in the Healthcare segment and robust growth in the Energy business and Disputes, Investigations & Economics segment. For full year 2014, total revenue increased 3.0% year over year to $859.6 million, while revenues before reimbursements (RBR) improved 4.0% year over year to $766.6 million. Adjusted EBITDA stood at $30.2 million in the reported quarter compared to $29.8 million in the prioryear quarter. Adjusted EBITDA was $116.2 million for full year 2014 compared to $124.1 million in 2013. Equity Research NCI Page 4
Segment Performance RBR for the Healthcare segment increased 39.0% year over year to $61.7 million in the reported quarter, driven primarily by business process management services. The unit s sales also benefited strongly from the recently purchased Cymetrix business. The robust top line also led to improved operating profit for the segment, which was up 6.7% year over year to $16.9 million. The Energy segment s RBR saw growth of 12.3% year over year to $25.8 million in the reported quarter. The growth was driven by investments made in senior hires and continued demand for energy efficiency and demand-side energy management services. The segment s operating profit increased 10.8% year over year to $8.2 million. The Disputes, Investigations & Economics segment s RBR increased 6% year over year to $77.4 million. The increase was driven primarily by higher demand for legal technology solutions and general litigation, and increased activity in global construction, partially offset by lower contribution from economics engagements. Segment operating profit was up 14.8% year over year to $26.3 million. The only unit that showed sustained weakness was the Financial, Risk & Compliance Advisory segment, which registered an 8.0% year-over-year decrease in RBR to $34.6 million. The decrease in RBR was driven by reduction in RBR from restructuring-related services. Operating profit for the segment increased 0.6% year over year to $14.7 million. Balance Sheet and Cash Flow At year-end 2014, Navigant had $2.6 million in cash and cash equivalents versus $2.0 million in the prioryear period. Bank debt was $109.8 million at Dec 31, 2014 compared to $56.7 million at Dec 31, 2013. Leverage (bank debt divided by trailing twelve month adjusted EBITDA) was 0.94 at Dec 31, 2014 compared to 0.46 at Dec 31, 2013. For full year 2014, net cash from operating activities aggregated $90.1 million, down from $119.8 million in the prior-year period. For full year 2014, free cash flow was $72.4 million compared to $78.8 million for 2013. For the full year 2014, Navigant repurchased approximately 1.7 million shares for $27.3 million at an average price of $16.50 per share. As of Dec 31, 2014, the company had $72.7 million worth of shares remaining under its share repurchase authorization. Outlook For full-year 2015, Navigant expects RBR in the range of $815 $845 million, while total revenues are expected to be in the range of $900 $930 million. Adjusted EBITDA is expected to be in the range of $115 $125 million and adjusted EPS is estimated to be between $0.90 $1.00. Going forward, the company remains focused on generating improved organic revenue growth, which further positions it for long-term growth. Equity Research NCI Page 5
VALUATION Navigant s current trailing 12-month earnings multiple is 14.7x, compared with the 19.4x average for the peer group and 19.3x for the S&P 500. Over the last five years, the company s shares have traded in the range of 10.7x to 20.4x trailing 12-month earnings. The stock is also trading at a discount to the peer group based on the forward earnings estimates. We maintain our long-term Neutral recommendation for the stock as we anticipate it to perform in line with the broader market. Our target price of $15.00 is based on 16.7 x our 2015 EPS of $0.96. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Navigant Consulting Inc. (NCI) 15.6 13.6 12.5 3.6 14.7 20.4 10.7 Industry Average 18.8 17.1 14.9 26.2 19.4 51.9 10.7 S&P 500 16.7 15.6 10.7 15.3 19.3 19.4 12.0 Huron Consulting Group Inc. (HURN) 20.7 19.6 13.5 19.8 20.9 22.4 8.6 Corporate Executive Board Co. (CEB) 22.9 20.2 12.7 14.5 23.9 31.9 13.8 CBIZ Inc. (CBZ) 12.8 6.1 9.1 14.8 7.5 Hill International, Inc. (HIL) 10.8 7.7 25.0 12.1 134.4 9.6 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Navigant Consulting Inc. (NCI) 1.3 1.7 0.9 8.8 0.2 0.0 7.0 Industry Average 5.8 5.8 5.8 19.7 0.6 0.5 9.2 S&P 500 5.3 9.8 3.2 25.5 2.1 Equity Research NCI Page 6
Earnings Surprise and Estimate Revision History Equity Research NCI Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of NCI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform - 15.6%, Neutral - 76.5%, Underperform 7.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst: Meenu Goyal Lead Analyst: Supriyo Bose Content Editor: Supriyo Bose QCA: Supriyo Bose Reasons for Update: 4Q14 &FY14 Earnings Update Equity Research NCI Page 8