Executive recruiter Korn/Ferry International
The company recently closed on another strong year, reporting that fee revenue grew 17% for the fourth quarter and 16% for the full year. Diluted earnings grew 15% for the quarter and 21% for the year; these figures excluded a tax benefit in this year's fourth-quarter and an investment loss reported in this year's third-quarter. Korn/Ferry's weak point was the Futurestep segment, a middle-management consultancy representing 13% of total fee revenue. Futurestep is growing sales quickly, but its uneven profitability drew questions from analysts on today's earnings conference call.
Yesterday, Fool contributor Rich Smith listed potential highlights of the earnings release in his Foolish Forecast. Overall, profit improvements were greater than sales growth for the full year, but were strong even without one-time items. Operating cost growth was right in line with sales increases, too. In other words, a nice quarter.
Korn/Ferry competes in the cyclical job placement market. The company's services tend to be more white-collar, focusing on executive search, recruiting, and leadership development programs. Indeed, senior-level and management positions make up more than half of revenue. Depending on how you cut it, this could make Korn/Ferry's business more or less cyclical relative to the overall economy.
If economic weakness stems from a loss of more blue-collar positions in such industries as manufacturing or construction, Korn/Ferry should be able to hold up better than more general recruiters such as Manpower
A direct competitor includes Heidrick & Struggles
Interestingly, I identified from last year's 10-K that although its earnings fluctuate greatly, Korn/Ferry's free cash flow has grown and remained positive, at least from 2003 through 2005. I'll wait until the 2006 10-K is issued to see this year's results, but the company appears to be consistently profitable from a free cash flow basis. It trades at only about 12 times 2005's reported free cash flow.
Consulting business models tend to be more volatile and susceptible to economic activity, but they generally stay profitable, thanks to low fixed costs and minimal capital expenditure needs. If you can stomach the volatility in reported earnings, caused by ever-changing employment trends and the difficulty of hiring consultants during economic upswings, Korn/Ferry is one of the better recruiting choices for the long term.