June 22, 2018

KFY – Although management sentiment suggests the potential for near-term headwinds, overly bearish market expectations suggest longer-term upside remains warranted

  • Korn/Ferry International (KFY:USA)currently trades below corporate averages relative to UAFRS-based (Uniform) Earnings, with a 18.4x Uniform P/E. At these levels, the market is pricing in bearish expectations for the firm, which, despite the potential for near-term headwinds given management’s negative sentiment, likely supports longer-term outperformance should KFY just maintain profitability at projected 2018-2019 levels
  • Specifically, management may be exaggerating their focus on M&A to expand their solutions, and may lack confidence in the sustainability of average revenue per partner in Executive Search, driven by concerns about new business growth in the segment. Additionally, they may have concerns about their brand initiatives, particularly in terms of the impact these initiatives could have on margins, and may be concerned about their expectation for a loss per share of $0.74 to $0.66 in Q1 2019. That said, market expectations are for Uniform ROA to fall to levels not seen since 2013. At these valuations, should the firm maintain Uniform ROA at current levels, equity upside is likely warranted
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