Navigant Consulting Inc. – An Earnings Rebound Should Lead to Gains

Navigant Consulting [NYSE:NCI - $12.05] provides numerous services through its three business segments: North American Dispute and Investigative, North American Business Consulting and International Consulting. Navigant Consulting is a specialized, international consulting firm combining deep industry expertise and integrated solutions to assist companies and their legal counsel in enhancing stakeholder value, improving operations, and addressing conflict, performance and risk related challenges. The Company focuses on industries undergoing substantial regulatory or structural change, including financial services, insurance, healthcare and energy. Navigant has offices in over 40 cities in North America, Europe and Asia.

NCI is a classic ‘buy low’ opportunity right now. The shares are close to their lows from the previous eight years while only trading for about half their old highs from 2004 – 2008. Earnings dropped from 2008 to 2009 and took the stock from a spring 2008 high of $22.80 back to a March 2009 low of $10.60 /share. NCI traded as high as $15.40 in January this year.

Here are NCI’s per share numbers from continuing operations as reported by Value Line:

* excludes $0.24 non-recurring loss

Zacks, Value Line and other leading analyst services project 2010 and 2011 earnings of $0.81 and $1.00 respectively. That level of earnings seems quite likely given they fall right in the range actually achieved in the five years from 2004 through 2008.

If those estimates prove reliable then NCI shares now trade at about 14.9x this year’s and 12x the 2011 expectations. Compare those multiples with the historical ones from the chart above. Navigant also is very cheap based on price/book value. NCI is trading at about 1.4x last year’s ending book value versus peak levels of 2x – 3.5x in all previous years.

A rebound to even 2x book value could take these shares back to $17 or higher. In fact, Morningstar now list present day ‘fair value’ as $16 /share in light of the improved 2010 outlook and assigns Navigant a 4-star rating (with 5-stars being best). Value Line sees EPS expanding to $1.60 by the 2013 – 2015 time frame and assumes an 18 multiple for the long term. That puts their mid-point 3 – 5 year price target at $30 or 149% above today’s close.

Even during the worst of times in 2008 and 2009 these shares never went below $10.60. The dead lows in 2004-2005-2006-2007 were $17.30, $15.30, $17.30 and $12.00 respectively. From the $12.05 closing quote there does not appear to be a lot of risk.

 Overall I see upside of 20% – 50% balanced against about 10% risk.

Investors fluent in options might want to consider this 7.25 month trade:

If NCI shares rise to at least $12.50 [+ 3.8%] by the Oct. 16, 2010 expiration date:

·         The $12.50 calls will be exercised.

·         You will sell your shares for $12,500.

·         The $12.50 puts will expire worthless.

·         You will have no further option obligations.

·         You will end up with no shares and $12,500 in cash.

That best-case scenario result would be $12,500 – $9,440 = $3,060

$3,060/$9,440 = + 32.4%

achieved over just 7.25 months on shares that only needed to gain 3.8% or better.

If NCI shares remain < $12.50 through Oct. 16, 2010:

·         The $12.50 calls will expire worthless.

·         The $12.50 puts will be exercised.

·         You will be forced to buy another 1000 NCI shares.

·         You will need to lay out an additional $12,500 in cash.

·         You will have no further option obligations.

·         You will end up with 2000 NCI shares.

What’s the break-even on the whole trade?

On the original 1000 shares it’s the $12.05 /share purchase price less the $1.10 /share call premium = $10.95 /share.

(Just coincidently) on the ‘put’ shares it’s the $12.50 strike price less the $1.55 /share put premium = $10.95 /share.

Your break-even is thus $10.95 or 9.1% below the trade origination price. NCI could fall almost 10% without causing a loss on this trade.

Summary: 

Navigant Consulting has rarely been offered at such an attractive valuation. Upside appears to be 20 – 50% while downside looks limited to about 10% based on historical trading data.

Investors who buy shares and simultaneously sell October $12.50 calls and puts will see cash-on-cash returns of > 32% over the next 7 ¼ months if NCI finishes above $12.50 on October 16^th.

      Disclosure: Author is long NCI shares and short NCI options.

    Dr. Paul Price

    www.BeatingBuffett.com