Heidrick & Struggling

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Uncle Sam spoiled the party for investors in executive-search firm Heidrick& Struggles (Nasdaq: HSII). The company thought its effective tax rate would be 20%, but an unanticipated mix in revenues and other technical factors hiked it to 42%. As a result, Heidrick & Struggles missed Wall Street's estimates, and the stock plunged 11.35% to $32.80.

The numbers themselves were hardly disastrous. In the fourth quarter, revenues increased 2.1% to $100.7 million, while net income increased 42.2% to $6.9 million. Operating income was $10 million, which translates into a 9.9% margin. That's up from 6.8% in the year-ago quarter, and it hits the company's goal of maintaining operating income margins of roughly 10%.

With stronger margins, Heidrick & Struggles is generating equally healthy cash flows. In the fourth quarter, operating cash flows were $33.4 million, up $25.7 million year over year. The company now has $203.7 million in the bank.

Over the past few years, Heidrick & Struggles has restructured its operations to create a much more efficient platform. Among other improvements, it provides better incentive structures for its headhunters, furnishing part of their compensation in the form of restricted stock units. This keeps consultants' interests more aligned with those of shareholders, especially since a consultant must stay with the company for three years to reap the full rewards of equity compensation.

The executive-search market is choppy from quarter to quarter. A handful of large search assignments can certainly skew revenues. However, the search market's long-term prospects are bright. Key trends include an aging population that will spur more executive retirements; an all-time low in average executive tenure, with most spending only four years at a single company; and a strong need for capable talent to manage complex, global organizations.

With Heidrick & Struggles' sturdy operating platform and robust brand, the company should benefit well from these trends. When the stock sells off, as it has in the wake of the latest earnings report, I'd call it an opportunity for longer-term investors to headhunt this stock for their own portfolios.

Fool contributor Tom Taulli does not own shares mentioned in this article.