CRA Int'l Selling Opportunity

Following Earnings, Sell CRAI

We reiterate our Sell rating on shares of CRA International (CRAI - Analyst Report) following the release of second-quarter results. Earnings per share in the quarter slightly exceeded the consensus estimate. However, we note that estimates were slashed following the company’s release of disappointing first-quarter results.

In fact, the company has seemingly fallen into a repeated pattern of delivering disappointing earnings one quarter, then beating the lowered consensus earnings estimate the following quarter, before again reporting disappointing results. This trend has now repeated consistently since the first quarter of 2008.

Given this repeated disappointment, we anticipate that investors will demand evidence that management has properly addressed the company’s operational problems before affording a higher multiple to CRAI shares.

We continue to have a negative outlook on the business consulting sector, and maintain Sell ratings on CRAI, Navigant Consulting (NCI - Analyst Report), The Corporate Executive Board (EXBD - Analyst Report) and First Advantage Corporation (FADV). With the economy currently in recession, companies in all industries are searching for ways to control expenses. Even in situations where a customer attributes significant value to the services provided by business consulting firms, these services may not be deemed critical in the short-run.

As such, we expect that the operating environment faced by the business consulting firms will be challenging for the foreseeable future. In the case of CRAI, utilization rates remain depressed despite restructuring efforts, and management has stated although its pipeline remains solid, the conversion to actual billings has been slow.

The shares of CRAI are currently trading at a premium to the peer group average on a price/earnings basis. Given the state of the company’s operations, we consider this premium to be unwarranted, and would use today’s strength in the shares as a selling opportunity.