September 10, 2018 – Shares of Korn Ferry (NYSE:KFY) dropped precipitously in afternoon trading on Friday upon the release of the company’s first quarter fiscal 2019 revenue report to Wall Street. The 23.5 percent decline put Korn Ferry shares on pace for their biggest one-day selloff since the search firm went public nearly 20 years ago.
During the quarter, Korn Ferry announced a rebranding campaign under which it is sunsetting its sub-brands (Hay Group and Futurestep) and moving to one unified brand – Korn Ferry. In connection with this move, the company incurred a charge of $106.6 million related to tradenames from prior acquisitions that it will no longer be using, resulting in an operating loss of $55.1 million with an operating margin of (11.8 percent). First quarter diluted loss per share was $0.70 compared to diluted earnings per share of $0.51in the comparable period last year.
But sunsetting brands and ditching trade names – and incurring an expense to do so – is nothing new. Analysts say investors overreacted and sold down the stock as a result. A look at the company’s latest figures bears this out: Korn Ferry performed well during the quarter, posting revenues of $465.6 million, a 16 percent increase from $401.3 million last year. Organic growth was driven by all three lines of its business, with executive search fees growing 19.7 percent, RPO and professional search expanding 27.5 percent and advisory services increasing 8.9 percent.
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It’s been an amazing run for Korn Ferry – and the recruiting sector in general – with the industry up nearly 10 percent on the year, according to figures released earlier this year by Hunt Scanlon Media.
The Los Angeles-headquartered executive recruiter and leadership consultant – the largest in the Americas as ranked by Hunt Scanlon – recorded a loss of $38.6 million, or 78 cents per share, compared to net income of $29 million, or 55 cents per share, a year ago. The results beat Wall Street expectations. The average estimate of three analysts surveyed by Zacks Investment Research was for earnings of 72 cents per share.
Just this past June, SunTrust RH analyst, Tobey Sommer, raised his stock price target to $76 from $72 (the stock now trades at $49 and has traded in a range of $35 to $69 in the last 52 weeks) and reiterated his buy rating – citing continued strength in the company’s talent acquisition business.
Big Growth in Store as Executive Recruiters Adapt to Automated Technologies
The executive search industry’s leading 50 players in the Americas once again surpassed $3 billion in revenues last year, according to industry newsletter ESR, in a market intelligence briefing just released by Hunt Scanlon Media.
“I am pleased to report fee revenue of approximately $466 million and strong profits, with adjusted EBITDA of approximately $71 million during our recently completed first quarter,” said Gary D. Burnison, CEO. “Overall, our revenues are up 16 percent year over year, with balanced growth across the firm. As disclosed last quarter, we are sunsetting our legacy logos and migrating to one unified brand – Korn Ferry,” he said. “Over the next 15 months, we will continue to move our organization towards an industry, solution and geographic orientation to capture the substantial opportunity we have as an organizational consulting firm.”
During the quarter, its executive search business in Asia was up 22 percent and EMEA was up 18 percent. According to the company’s senior vice president for investor relations, Gregg Kvochak, Korn Ferry’s expansion in the quarter was broad-based: by industry specialty, its consumer goods and financial services practices were each up 23 percent; its technology practice was up 16 percent, industrial was up 15 percent and life sciences & healthcare rose 14 percent.
545 search consultants supported that sector growth in the quarter – with annualized fee production per consultant topping out at $1.42 million. 1,708 new search assignments were opened during the first quarter, up three percent from the year ago period.
Hedge Fund and Other Investing Activity
Publicly held search firms, namely Korn Ferry and rival Heidrick & Struggles, have recently seen a flurry of investor activity. Hedge funds, in particular, have been acquiring new stakes in both companies, while others have been reducing positions and moving on to other investments throughout the talent management sector.
A number of institutional investors have recently added to or reduced their stakes in Korn Ferry’s stock: Chartwell Investment Partners recently lessened its stake in the firm by 4.8 percent. The investment company owned 351,332 shares of the business services provider’s stock after selling 17,668 shares. Korn Ferry comprises about 0.6 percent of Chartwell Investment Partners’ holdings, making the stock its 20th largest holding. Chartwell owned approximately 0.62 percent of the search firm worth $21,758,000 as of its most recent filing with the Securities and Exchange Commission.
Arizona State Retirement System lessened its stake in shares of Korn Ferry by 7.7 percent; its holdings of 82,238 shares are now worth $5,093,000.
Baskin Financial Services recently lifted its stake in shares of Korn Ferry by 0.7 percent. It now owns 127,557 shares of the firm’s stock valued at $7,900,000 after acquiring an additional 850 shares during the last quarter. Cambria Investment Management also lifted its stake by 11.5 percent. It now owns 8,355 shares of the firm’s stock valued at $517,000 after acquiring an additional 864 shares during the last quarter. In addition, Advisors Preferred raised its stake in shares of the firm by 102.6 percent. It now owns 1,732 shares of Korn Ferry’s stock valued at $107,000 after acquiring an additional 877 shares during the last quarter. Crossmark Global Holdings also recently increased its stake in shares of Korn Ferry by 6.8 percent. It now owns 13,853 shares of the stock, valued at $858,000, after acquiring an additional 880 shares during the last quarter. Lastly, Mason Street Advisors lifted its stake in shares of Korn Ferry by 6.7 percent in the first quarter. It now owns 15,672 shares of the firm’s stock valued at $809,000 after acquiring an additional 979 shares during the last quarter. Currently, 89.66 percent of the stock is owned by institutional investors.
Analysts Weigh In
Several equity analysts have recently weighed in on the search firm: Zacks Investment Research downgraded Korn Ferry from a “buy” rating to a “hold” rating in a report on Aug. 30. Credit Suisse Group assumed coverage on the company in a report on Aug. 10. They set an “underperform” rating and a $55 price target on the stock. ValuEngine downgraded Korn Ferry from a “strong-buy” rating to a “buy” rating in a report this past Tuesday. But SunTrust, as noted, boosted its price target on the firm to $72 and gave the company a “buy” rating in a report on June 14. And Sidoti boosted its price target on Korn Ferry from $65 to $80 in a report also in June. One research analyst has rated the stock with a sell rating, two have given a hold rating and three have assigned a buy rating to the stock. The company currently has a consensus rating of “hold” and a consensus price target of $64.80.
Insider Shares Sold
According to SEC filings, Mr. Burnison sold 20,000 shares of company stock in a transaction that occurred on July 10th. The stock was sold at an average price of $63.35, for a total value of $1,267,000.00. Following the completion of the sale, the company’s CEO now owns 184,150 shares in the company, valued at approximately $11.6 million.
Byrne K. Mulrooney, CEO of Korn Ferry’s professional search, RPO and products segment, sold 1,607 shares of the firm’s stock in a transaction that occurred three days after Mr. Burnison’s sale. The stock was sold at an average price of $65.07, for a total transaction of $104,567.49. Mr. Mulrooney now owns 74,680 shares in the company, valued at approximately $4.9 million. Insiders have sold a total of 46,293 shares of company stock worth $2,923,128 in the last quarter. Company insiders own just 0.91 percent of Korn Ferry’s stock.
Assuming worldwide economic conditions, financial markets and foreign exchange rates remain steady, Korn Ferry expects revenue in the range of $470 million to $490 million for the fiscal second quarter. Analysts surveyed by Zacks had expected revenue of $476.9 million. The firm also expects its per-share earnings to range from 76 cents to 84 cents.
At press time Sunday evening, Korn Ferry enjoyed a market cap of $2.812 billion.
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; Stephen Sawicki, Managing Editor; and Andrew W. Mitchell, Managing Editor – Hunt Scanlon Media