Executive placement firm Korn/Ferry (NYSE:KFY) continues to benefit from a strong global job market, but the stock is down over 6% after the company reported second-quarter results this morning. Sounds to me like the boss is not giving credit where it's due.
Korn/Ferry's quarter was actually quite strong, as total sales grew 24% and reported diluted earnings also advanced 24% (though, according to the company, earnings were up 32% when removing stock-option expenses from the current quarter). All major regions saw increased fee revenue in the double digits, with North America growing 27.5%, Asia Pacific up 24.5%, and Europe up 17.9%. Latin America was the only laggard, with 8.9% growth, but it represents only about 3% of total overall revenue.
The downside to things going so swimmingly is that the market is concerned that results will slow going forward. Certain analysts may have also been expecting further upside to the quarter, and Korn/Ferry is currently approaching the slow holiday season. For a market biased toward the shorter term, any projected weakness over the next few quarters is a recipe for a drop in the stock price, which is what happened today.
It's inevitable that Korn/Ferry will hit a speed bump at some point going forward, as its business is highly dependent on economic conditions in the regions and industries it operates in. For instance, technology and financial services constituted 15% and 18% of 2006 fee revenues, respectively, so any downturn in these industries will hurt financial results. The same can be said for North America and Europe, which collectively make up over 80% of recruiting fees.
However, as I've pointed out previously, Korn/Ferry's cash flow tends to hold up well during economic downcycles, and low levels of debt help it withstand periods of uncertainty. It is also more profitable than archrival Heidrick & Struggles (NASDAQ:HSII) and trading at a lower multiple. Finally, it's less exposed to the temporary staffing and midlevel management functions that can really take a hit during a downturn. Firms in this space include Manpower (NYSE:MAN), KForce (NASDAQ:KFRC), Labor Ready (NYSE:LRW), or even online recruiter Monster Worldwide (NASDAQ:MNST).
Now may not be the best time to pick up some shares; a better time would be during an economic malaise, but it's difficult to predict when that will happen. In any case, Korn/Ferry is worth keeping your resume updated for.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
