Navigant Consulting NCI began 2013 on a steady note, with first-quarter revenue up by a modest 1% to $187 million. Benefiting from its recent cost-realignment initiatives, the company reported a 150-basis-point improvement in operating margin to 13.1%. The company’s top- and bottom-line results were in line with our expectations and we are maintaining our $14 fair value estimate and narrow moat rating for the company. Except for its Dispute, Investigations, and Economics segment (a 15.6% year-over-year decline), Navigant reported double-digit revenue growth across its other three segments.
As widely expected, the Health Care and Energy segments led from the front with 19.3% and 16.6% yearover- year growth rates, respectively. Financial, Risk & Compliance Advisory turned in another strong performance with 12.2% growth, but we expect this segment to struggle in the near term as four large mortgage servicing review assignments ramped down following the settlement reached between OCC and mortgage servicers at the beginning of this year. Based on a rough estimate, this is expected to negatively affect Navigant’s growth by three to four percentage points.
On the dispute side, an inconsistent demand environment continues to pose headwinds for Navigant and so far we haven’t seen any indicators that point to a change in the status quo. Parts of the disputed segments, including credit-crisis related litigations and technology-related offerings, have done well in recent times while others such as forensic investigation fared poorly. Navigant’s dispute practice is also being hurt by law firms shifting some activities (those that were typically outsourced) in-house.
As health care firms try to restructure their operations in a very challenging business climate, investors expect demand for Navigant’s health care practice to remain strong in the coming years. An increased focus on clean energy and renewable energy will likely keep the demand for energy-related consulting assignments strong in the near term as well.
Suggested Reading: Largest Hedge Funds
