FTI Consulting Upgraded - Analyst Blog

The rating for Baltimore, Maryland-based FTI Consulting Inc. (FCN), a global business advisory firm, has been upgraded to Neutral from Underperform.

The rating was upgraded as FTI's third -quarter 2010 earnings results suggest that the company is gaining market share in the Forensic and Litigation Consulting and Strategic Communication segments. The Forensic and Litigation Consulting and Technology segment each generated double digit growth in revenue. Strategic Communications also improved 5.8% year over year.

During the third quarter, several segments benefited from positive international contributions, including new operations in Germany and Spain that helped the Corporate Finance/Restructuring segment, strong demand in U.K. and Australia helped the Technology segment, and growth in Asia benefited the Forensic and Litigation segment.

We also remain positive regarding FTI's brand consolidation strategy, where the company plans to bring all its acquired firms under one brand i.e. FTI Consulting hopefully by November 2011. FTI has acquired more than 25 companies over the last five years.

FTI Consulting believes that the one-brand strategy will enhance brand recognition, particularly in the new market. Moreover, professionals of all the firms will be able to work as a team and provide superior services to clients all over the world. The company anticipates incurring a non-recurring charge of $25 million, or 36 cents per share on this strategy in the fourth quarter of 2010.

However, we still remain cautious on the stock as the Corporate Finance and Restructuring segments remain a drag, owing to a softer trend in bankruptcy work and a slowdown in larger cases. The company is also experiencing a tepid pace of recovery in the Merger & Acquisition market.

While demand remains solid within most of the company's business practices, the company has been slow in improving profitability. We note that FTI Consulting remains extremely aggressive in its hiring practices, leading to a growth in human capital outlays.

Moreover, despite improving corporate earnings and strong corporate liquidity, clients spending remain cautious, given the concerns regarding the strength of the economic recovery, volatile financial markets and a lack of visibility in the impact of future tax and regulatory policies. Additionally, the Zacks Consensus Estimate has not budged in the last 30 days, implying a lack of catalysts to push the stock upward.