FTI Consulting currently trades at $164.99 per share and has shown little upside over the past six months, posting a small loss of 1.5%. The stock also fell short of the S&P 500’s 13% gain during that period.
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Why Is FTI Consulting Not Exciting?
We're swiping left on FTI Consulting for now. Here are three reasons we avoid FCN and a stock we'd rather own.
1. Shrinking Adjusted Operating Margin
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
Analyzing the trend in its profitability, FTI Consulting’s adjusted operating margin decreased by 2.7 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 9.4%.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, FTI Consulting’s margin dropped by 9.1 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. FTI Consulting’s free cash flow margin for the trailing 12 months was 1.2%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
FTI Consulting historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 13.9%, somewhat low compared to the best business services companies that consistently pump out 25%+.
Final Judgment
FTI Consulting isn’t a terrible business, but it doesn’t pass our bar. With its shares lagging the market recently, the stock trades at 19.1× forward P/E (or $164.99 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the Amazon and PayPal of Latin America.
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