Navigant Reiterated at Neutral

We reiterate our Neutral recommendation on Navigant Consulting Inc. (NCI - Analyst Report) for the long term, based on its first quarter 2011 earnings, opportunities associated with health care reform and the integration of Ethos Physician Services, partially offset by a restricted consultant utilization rate and inadequate new client growth.

Navigant’s first quarter 2011 adjusted earnings per share of 19 cents outpaced the Zacks Consensus Estimate by 3 cents. However, revenue fell short of our expectation.

Opportunities associated with health care reform will continue to drive demand higher as regulatory activities in the sector are increasing. Now the industry seeks expertise to improve profitability.

The Dispute and Investigative Services division is also improving on strong demand in the field of credit crisis litigation, anti-corruption compliance and investigations.

Navigant has been growing inorganically for the last several years. As a major strategic step, Navigant completed the integration of recently acquired Ethos Physician Services. We believe the acquisition comfortably fits in Navigant’s product portfolio and is in sync with its key long-term strategy.

The International Consulting division, which was the weakest performer earlier, was up 22% sequentially in the recently concluded first quarter. Management believes that the segment is on the rebound after a tough 2010.

On the flip side, although utilization rate improved to 78% in the first quarter it still lagged the high level reached back in 2007–2008. Moreover, corporate customers are looking to better manage internal costs, following the significant expense outlays associated with Sarbanes-Oxley related issues.  

We believe Navigant is currently fairly valued and does not provide any above-market potential. Some of the competitors of Navigant include CBIZ Inc. (CBZ - Snapshot Report) and Gartner Inc. (IT - Snapshot Report).

Although we prefer to remain on the sidelines, given the pros and cons associated with the company, it currently retains a Zacks #2 Rank, which translates into a short-term Buy rating.

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