It is a pattern that has become all too familiar: A dazzling price performance in 2021 that turned into a rout as share prices dramatically pulled back this year.
And 2021’s big surge came in the wake of depressed—and depressing—prices of the pandemic that began early in 2020.
Korn Ferry (KFY, Financial) is one of those companies, even though its pre-rally slump started in 2018 rather than 2020. Now, roughly four years later, it trades very near its 10-year average:
About Korn Ferry
Founded in 1969 by Lester Korn and Richard Ferry, the onetime headhunting organization has widened its vision. As the company explained in its 10-K for fiscal 2022:
“Today, we believe we are the organizational consultancy that is uniquely positioned to help companies look at talent and strategy together, ensuring that they have the right people in the right places and are providing them with the right rewards. We bring their strategies to life by designing their organizational structure and helping them hire, motivate and hold on to the best people. And we help professionals navigate and advance their career.”
On its website, it uses this potential gap graphic to describe how all its services combine to help companies reach new targets:
It also reports employing 10,000 professionals in more than 50 countries. Their work is divided into five core areas:
- Organization Strategy
- Assessment and Succession
- Talent Acquisition
- Leadership and Professional Development
- Total Rewards
On its website, it claims its clients are 25% more profitable than their peers and that it partners with 97% of Fortune’s (magazine) most admired companies.
Competition
The company reported in its annual filing that there are no direct competitors because of its diversified range of services, but names some competitors on individual lines of service.
For example, in consulting it named McKinsey, Willis Towers Watson (WTW, Financial) and Deloitte. For the executive search segment, named competitors include Egon Zehnder, Heidrick & Struggles International Inc. (HSII, Financial), Russell Reynolds Associates and Spencer Stuart. Other segments have their own competitors.
As for a competitive advantage, Korn Ferry believes it has one because “no other company provides the same full range of services, uniquely positioning us for success in this highly fragmented, competitive landscape.”
Its high margins back up its claim.
Financial strength
The company has a good ranking for financial strength, in part because its debt load is reasonable and it has strong cash reserves. The balance sheet shows, as of March 31:
- Cash, cash equivalents and marketable securities: $1.04 billion
- Short-term debt: $0
- Long-term debt: $395 million
- Short- and long-term capital lease obligations: $200 million
This data, showing more cash availability than debt and lease obligations, should help dispel fears about the Altman Z-Score of 2.97. That metric puts Korn Ferry into the grey range, but there should be no danger of financial turmoil when cash availability is well above its obligations.
And as the interest coverage ratio shows, the company generates enough operating income to pay its interest expense more than 18.5 times over.
The WACC versus ROIC ratio is also attractive, with the return on invested capital (21.28%) slightly more than double the weighted average cost of capital (10.11%).
Profitability
A strong ranking of 9 out of 10 and many dark green bars show Korn Ferry is outperforming both its peers and competitors in the business services industry and its own history.
Its net margin is higher than 80.51% of the 1,052 companies in the industry. Return on equity is higher than 81.23% of peers and competitors.
Growth
With full marks in this category, management appears to be doing an excellent job of turning Korn Ferry's revenue into profits. As we see in the table, revenue increased by an average of 12.1% per year over the past three years, while Ebitda grew an average of 40.5% per year and earnings per share without non-recurring items shot up 48.9%.
Nor has Korn Ferry been a slouch at growing its free cash flow:
Dividends and share buybacks
Where Korn Ferry does lag its industry peers is in its dividends. As the table shows, its dividend yield is just 0.82%, despite a share price that has fallen significantly since late last year. The yield is lower than 90.56% of industry competitors that pay a dividend.
The dividend per share chart shows an on-again, off-again pattern over the past decade. As the chart shows, there were big increases in fiscal 2015 and 2016, then no more until 2022:
Turning to share repurchases, the numbers look good for the past three years, but over the past 10 years, we see quite a bit of dilution:
Valuation
Given the current price-earnings and PEG ratios, we could assume Korn Ferry's shares are currently undervalued. The PEG ratio is quite affected by the Ebitda growth rate of 16.58% per year over the past five years.
Undervalued is also the verdict of the discounted cash flow calculator. The result is based on the 10-year growth rate of earnings per share without NRI and confidence in the result is bolstered by Korn Ferry’s 4.5 out of 5-star predictability score:
In contrast, the GF Value chart, which is one basis of the 5 out of 10 value ranking, sees fair valuation:
Fundamentals summary
Overall, Korn Ferry has an excellent 94 out of 100 GF Score, driven by high points for growth, profitability and momentum and moderate grades for financial strength and GF Value. As a result, it has high outperformance potential.
Gurus
Eight gurus held positions in the company when markets closed on March 31. The three biggest shareholders in the first quarter were:
- John Rogers (Trades, Portfolio) of Ariel Investment, who added 3.49% to reach 790,355 shares. They represented 1.47% of Korn Ferry’s outstanding shares and 0.46% of Ariel’s assets under management.
- Hotchkis & Wiley added 19.91% to finish the quarter with 783,674 shares.
- Chuck Royce (Trades, Portfolio) of Royce Investment Partners upped his holding by 22.34% to close out with 683,407 shares.
Conclusion
Thanks to diversification of its services, Korn Ferry has become an industry powerhouse, generating returns that appeal to shareholders.
The share price has tumbled over the past nine months, making it more affordable. Whether that means fairly valued or undervalued will depend on the eye of the beholder.
For value investors who are flexible, the company may be worth a closer look. Growth investors will want to wait until the price turns around, while most income investors will turn up their noses at Korn Ferry’s dividend.
