Consulting Preview (CRAI, EXPO, FCN, HURN)

This week, on February 1st after the close, Exponent (EXPO), the science and engineering consulting firm, will be reporting Q4 results. While EXPO certainly caters to different business segments, the earnings report will hopefully provide a starting point and high-level thoughts on the overall consulting industry. Later on in the month and spilling into March, we will get results from CRA International (CRAI), FTI Consulting (FCN), and Huron Consulting Group (HURN).

Fundamentally, William Blair recently conducted their quarterly proprietary survey of senior consultants. Overall, analyst Andrew Nicholas said that 57% of respondents said that demand for their services improved on a sequential basis in the fourth quarter (down a touch from 58% last quarter). Meanwhile, the weighted-average forward growth outlook for the next 12 months came in at 6%, the third straight quarter of sequential improvement in the metric and above the 4%-5% forward growth expectations they have generally seen on average since 2012. When you start looking at the responses on individual categories, there is clearly one standout.

“Restructuring demand remains strong, with 83% of respondents indicating a sequential increase in demand in the fourth quarter…Demand trends for M&A advisory remain below the historical average in absolute terms but go-forward expectations are increasing; 57% of consultants saw improved demand sequentially and 86% of respondents expect positive growth in the next 12 months. Healthcare demand trends continued to moderate, with 47% of respondents seeing demand improvements over the past three months (down from 71% last quarter). In litigation-related services, demand sentiment for disputes and investigations was flat, while sentiment among economic consultants continued to track higher, with 80% of respondents seeing a sequential increase over the past three months.”

In terms of company-specific checks:

CRA International – William Blair’s survey indicated significant improvement in sequential demand for economic consulting over the past two quarters, in addition to steadily improving weighted average growth expectations (+4% over the next 12 months). “At a competitor conference in December, CRA reiterated its belief that the regulatory environment both in North America and abroad remains supportive of continued growth in its antitrust and competition economics practice. We would expect the release of the final version of new merger guidelines to be supportive of this dynamic going forward.” They were also able to identify Spirit Airlines (SAVE) as a client of CRA relating to the attempted merger with JetBlue Airways (JBLU). Understandably, we know that the merger was recently blocked. However, leading up to that point should have acted as a tailwind for CRAI.

FTI Consulting – The survey results showed continued strength in demand for restructuring, with 83% of consultants indicating a sequential increase in demand in the fourth quarter. Meanwhile, 100% of respondents expect growth in restructuring demand over the next year. The one wildcard for this company stems from Compass Lexecon co-founder Jonathan Orszag being fired in late November amid accusations of a breach in fiduciary duty. “While it is incredibly difficult to assess the potential financial impact from Orszag’s departure given the high number of variables (e.g., results of pending litigation, the size of Orszag’s book, likelihood of colleagues leaving FTI in response), it adds considerable uncertainty to the outlook for the company’s economic consulting segment, which we estimate will represent 22% of total company revenue and 19% of total company EBITDA (excluding corporate SG&A expense).”

Huron Consulting Group – Survey results indicate a modest reduction in demand for healthcare consulting, with only 47% of consultants indicating a sequential increase in demand in the fourth quarter. On a weighted average basis, healthcare consultants expect 4% growth over the next 12 months, down from 6% in the prior two quarters. Meanwhile, demand for revenue cycle management and performance improvement services, where Huron has considerable exposure, remains positive but now sit solidly below the record readings that were seen in Q2 2023.