Los Angeles-based Korn Ferry (KFY) and its subsidiaries offer organizational consulting services worldwide. It operates in four business segments: Consulting; Digital; Executive Search; and RPO (Recruitment Process Outsourcing) & Professional Search. Its shares have gained 5.9% in price over the past nine months to close its last trading session at $66.61.
In addition, the stock has gained nearly 7% since the company released its third-quarter earnings, which surpassed consensus estimates. The company also repurchased 304,500 shares of stock for $22.1 million during the last quarter, exhibiting robust cash flow generating capabilities.
In terms of forward non-GAAP P/E, the stock is currently trading at 10.91x, which is 40.2% lower than the 18.24x industry average. Also, its 1.26x forward EV/Sales is 29.5% lower than the 1.79x industry average. And KFY's 2.24x forward Price/Book is 16.3% lower than the 2.68x industry average.
Here is what could shape KFY's performance in the near term:
Positive Developments
In December, KFY expanded its digital presence with the launch of Korn Ferry Intelligence Cloud, a new AI-enabled talent analytics platform. Intelligence Cloud assists in obtaining, managing, and mobilizing personnel and skills today and in the future. Intelligence Cloud features Korn Ferry's Success Profiles, which are fundamental building blocks for evaluating potential and performance. Success Profiles leverage real-time data and insights to confirm what top-tier talent looks like, with integrated intelligence that spans more than 4,000 positions.
Robust Financials
KFY's total revenue increased 43.4% year-over-year to $685 million during the third quarter. Its operating income increased 93.7% year-over-year to $126.3 million. The company's adjusted net income grew 67.4% from its year-ago value to $86.9 million, while its adjusted EPS grew 67.4% from the prior-year quarter to $1.59. In addition, its adjusted EBITDA surged 43% from its year-ago value to $138.3 million.
Strong Profitability
KFY's 12.2% trailing-12-months net income margin is 88% higher than the 6.5% industry average. Also, its ROC, levered FCF margin, and ROA are 91.7%, 228.1%, and 75.4% higher than the respective industry averages. Furthermore, its $418.60 million cash from operations is 109.7% higher than the $199.60 million industry average.
Impressive Growth Prospects
The Street expects KFY's revenues and EPS to rise 43% and 142.6%, respectively, year-over-year to $2.59 billion and $6.09 in its fiscal 2022. In addition, KFY's EPS is expected to rise at a 15% CAGR over the next five years. Also, the company has an impressive earnings surprise history; it topped the Street’s EPS estimates in each of the trailing four quarters.
Consensus Rating and Price Target Indicate Potential Upside
The two Wall Street analysts that rated KFY rated it Buy. The 12-month median price target of $104 indicates a 56.1% potential upside. The price targets range from a low of $90.00 to a high of $118.00.
POWR Ratings Reflect Solid Prospects
KFY has an overall B grade, which equates to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. KFY has a B grade for Quality and Value. KFY's solid earnings and revenue growth is consistent with the Quality grade. In addition, the company's lower-than-industry multiples are in sync with the Value grade.
Of the 19 stocks in the A-rated Outsourcing – Staffing Services industry, KFY is ranked #8.
Beyond what I stated above, we have graded KFY for Growth, Sentiment, Stability, and Momentum. Get all KFY ratings here.
Note that KFY is one of the few stocks handpicked by our Chief Value Strategist, Steve Reitmeister, currently in the POWR Value portfolio. Learn more here.
Bottom Line
KFY's business strategy, which is widely diverse in terms of area, segment, and industry, continues to pay off. Its bottom line has benefited from revenue growth, operational efficiency, and cost reductions. In addition, the company's strong financial position enables it to make strategic acquisitions and invest in planned expansion. So, we think the stock should continue to benefit in the long run and could be a great bet now.
How Does Korn Ferry (KFY) Stack Up Against its Peers?
KFY has an overall POWR Rating of B, which equates to a Buy rating. Check out these other stocks within the same industry with A (Strong Buy) ratings: Heidrick & Struggles International Inc. (HSII), Resources Global Professionals (RGP), and Recruit Holdings Co. Ltd. (RCRUY).
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KFY shares were unchanged in premarket trading Monday. Year-to-date, KFY has declined -11.88%, versus a -6.40% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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