Huron Consulting Group (HURN) - A Challenging Situation
2008 is turning out to be a difficult year for buy and hold investors. In order to realize profits and maintain a healthy risk profile, a certain amount of flexibility is required. The year seems to have a way of turning some attractive situations into losing prospects as economic dynamics continue to shift.
One such investment opportunity is Huron Consulting Group (HURN). The company was profiled on this site in October as being a strong growth company with a bright future. However because much of their business comes from the financial sector, many clients have been at the cusp of the prevailing economic hardships. The stock has responded in kind dropping as much as 50% as investors realized that the growth level would likely contract.
This week management had a presentation at the William Blair Growth Stock conference in Chicago. Management acknowledged the weakness in their financial segment and yet claimed that the other business segments (higher education, health care, document review and corporate consulting services) were still experiencing robust growth. The plan at this time is that the company will reduce headcount in the financial area at the end of June although it has not laid out any specifics in regard to a reduction in staffing. The expectation is that the company would be able to meet guidance without the layoffs but it is going to cut the costs in order to bring EPS growth to a higher level.
In the end, William Blair is still modeling 25% or stronger second half growth in the health care and higher education segments and expects the weakness in the financial sector to moderate. In 2009, the estimate is for 20% growth in non-financial segments and flat revenue in the financial segment. The focus of this segment is expected to change from working in the credit markets to a broader “demand drivers” including international arbitration, financial re-statements, and convergence of international accounting standards. One concern might be that the firm has less experience in these niches and may find it difficult to compete in this field.
While the stock has added 25% from its spring low, I am becoming increasingly fearful that we could see it trade back down and possibly break the low point from March. The discussion surrounding the company has become increasingly positive and yet seems to ignore the more difficult environment that is spreading to other parts of the economy. As unemployment picks up and the fed contemplates tightening in order to fight inflation, the potential for broad weakness is becoming more of a reality. If growth expectations for HURN are called into question or one of their other business lines experiences less than stellar growth, one can expect holders of the stock to hit the exits quickly driving down the share price. I would exercise caution in this name and even look for opportunities to build short positions with disciplined risk controls.
FD: Author does not have a position in HURN
would you consider doing a review on american superconductor-amsc? they had an significant earnings beat in the first quarter 2008 reported early May 2008, having a fantastic 245% backlog increase in the current second quarter 2008, the analysts revised everything upward, and the story seems fresh and relevant.
June 21st, 2008 at 10:16 amGoogle- a bullish perception. The shares are in the $540s, but less the $40+ cash the enterprise cost is $500-ish. the eps estimates are $20 to $21 this year, while managers at Gabelli Media Trust say eps is understated by about $1 per quarter. with these adjustments the Google might be priced around $500-ish with eps of $24 to $25 this year. several forward growth catalyst include.. desplay ads rise w/ 2008’s doubleclick, wireless ads rise w/ 2008’s andriod, youtube monitizes during 2009, international still tremendous, cloud computing ramp w/ Salesforce.com, more applications progress, Yahoo! goes from competitor to contributor, MSFT shrinking.
June 21st, 2008 at 12:09 pmHey Boris,
I think Google could be susceptible to a broad market swing lower not because the company is in trouble, but just because the premiums investors are willing to pay for growth will contract during economically weak times. I must say that I am tempted to take a small short position based on the way it is trading, and the anemic broader market action.
AMSC looks a bit vulnerable too at first blush. It doesn’t fit into my universe of stocks public less than 5 years so I have not done extensive research, but it appears investors are betting the farm on growth that has yet to be proven. Best case scenario would be that the company ramps up earnings to catch up with the current stock price. Worst case is much more dangerous with profitability being pushed farther back on the calendar and frustrated shareholders bailing out. But that is just a cursory overview without an in depth analysis.
Thanks for the comments,
June 21st, 2008 at 1:28 pmZDS
Google with $40 cash backed out = $500-ish and eps of $20 to $24 in ‘08 depending on how its measured and last quarter ended 3/31/08 the top line grew 47%. i am surprised you are that negative.
it must be that you take no stock in the +47% which = a P/E of 20x - 25x and a PEG of .50 to .40 looks like you dont believe the growth rate is anywhere near that robust or a deceleration is right around the corner. fair assesment?
AMSC- i am not surprised by your conclusion. but remember
June 21st, 2008 at 4:18 pmon 3/31/2008 the backlog was $199 million +17% from 12/31/07 and today 6/21/2008 the backlog is $679 million +240% from 3/31/08. with this i believe there is a little more “proven growth” then first glance.
Google- regarding premium contraction, Google has been stuck around $500-ish since late 2005, believe it or not thats 10 quarters of reporting gains on the income statement and still the stock hasnt advanced. If thats the case, looks like you are calling an additional round of declining valuation. Google has based near $500 for going on 2+ years, and you believe it gets worse before it gets better. Unless you see something messy thats not obvious, arent you being a little bit overly negative?
June 22nd, 2008 at 1:48 pmBoris, you certainly could be right. I’ll give you my honest opinions always, but I’m not immune to getting it wrong from time to time. My view is that investors as a broad group will become overly negative as well. This may mean that stocks are pushed below their theoretical value (which is what typically happens in bear markets). Unfortunately, just because the company as a whole has a solid business model may not insulate it from broader market based selling.
I’m not completely convinced one way or another on the “theoretical value” of Google, but I am fairly convinced that the general market sentiment will get worse before it recovers which will likely mean lower prices for many well thought of stocks.
Just my opinion - we all have one
June 22nd, 2008 at 2:17 pmZach
its clear you have a good solid conservative macro view. i did a google long near 540 with some fear tuesday. i will use small gains from a google short to pad the stop loss damage if it keeps sinking. your blessing on google long would have been better.
June 24th, 2008 at 11:49 amwell google didnt have any kind of low point near 540, even though it has slumped downward for 39 trading days from $600. i had a stop loss, thank god, the sellers no mercy.
June 28th, 2008 at 11:21 am