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On Dec 2, we upgraded our long-term recommendation for management services provider FTI Consulting, Inc. (FCN - Analyst Report) from Neutral to Outperform. The company’s diligent execution of operational plans, strategic decision to extend its global footprint and continuous organic growth across the industry verticals augur well for its growth prospects. However, continuous budgetary pressures along with a weak macroeconomic environment could weigh on the margins moving forward.

Why the Upgrade?

FTI Consulting is well positioned to benefit from an increased regulatory scrutiny and a proliferation of corporate litigation, which would leave the management teams of public companies with little leeway to deal with complex issues. External pressure on the management teams is further compounded by active investigations by government auditors and authorities including the Securities Exchange Commission (SEC), the Department of Justice (DOJ) and the state attorneys.

Additionally, structural changes have become a necessity in the rapidly evolving global markets as management teams look to fend off rivals, protect intellectual property rights and transform businesses via M&A, divestiture and other restructuring activities. We believe that the demand for the company’s specialized consulting services should experience a robust growth over the long term.

Internationally, FTI Consulting’s unique capabilities of bringing together damage assessment, accounting, economics, statistics, finance, industry and global footprint make it an excellent partner for clients dealing with international arbitration issues, and generating continued revenue growth in the existing international operations, coupled with contributions from the acquisitions made over the past few months in Europe, Asia and Latin America. FTI Consulting’s international expansion remains strong and will likely continue in the future as well.  

Earnings estimates for full year 2013 for FTI Consulting have moved up in the last 30 days as 4 out of 5 estimates have been revised upward. The current Zacks Consensus Estimate for the year is pegged at $2.30, up 6% from $2.17 in the last 30-day period. This represents a healthy upside from management guidance of an adjusted EPS for 2013 in the range of $2.10 to $2.20. The stock is also trading near its 52-week high with a forward PE of 19.6x. All these factors offer a solid investment proposition for the stock.   

However, despite improving corporate earnings and a strong corporate liquidity, clients’ spending patterns remain cautious, given the concerns over the current market environment, volatile financial markets and a lack of visibility regarding the impact of future tax and regulatory policies.

Certain parts of the business have also been experiencing pricing pressure. As such, the company may witness lower margins. The changes in capital markets, legal or regulatory requirements and general economic factors could further reduce demand for services, which thereby could affect the company’s overall profitability.

Other Stocks to Consider

FTI Consulting has a Zacks Rank #1 (Strong Buy). Other stocks that look promising and are worth considering now in the industry include CoreLogic, Inc (CLGX - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy), and CBIZ, Inc. (CBZ - Snapshot Report) and Corporate Executive Board Co. (CEB - Snapshot Report), both carrying a Zacks Rank #2 (Buy).

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