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We have recently downgraded Navigant Consulting Inc. (NCI - Analyst Report) to Neutral from Outperform.

Navigant reported strong quarterly results and lifted its full-year guidance. The company’s third-quarter 2011 adjusted earnings per share exceeded the Zacks Consensus Estimate by 2 cents. The better-than-expected results were driven by increased demand across the company’s key practice areas. Navigant’s total revenue also grew both annually and sequentially.  

Riding on the opportunities associated with health care reform, Navigant continues to sustain its business momentum as the industry seeks expertise to improve profitability. The acquisitions of EthosPartners Healthcare Management and Paragon Health should support the company in this regard, helping it to achieve its operational goals offer opportunities associated with health care reform.

Going forward, management identifies disputes, economics, health care and energy as key areas for long-term growth and subsequently aims to sharpen its investment focus within these practices.

However, although the company continues to realize strong leverage of selling, general and administrative expenses and record considerably high levels of consultant utilization, its gross margin expansion remained subdued. General and administrative expenses were slightly sequentially higher in third-quarter 2011 due to higher bad debt.

Navigant witnessed 10.8% decline in average consulting FTE in the third quarter of 2011. The lower average consulting FTE resulted from higher-than-normal voluntary attrition and headcount reductions made in 2010 to better align resources with demand in certain markets and locations.

Currency fluctuations as well as regulatory stringencies due to ongoing uncertainty in the global economy also pose some risks to the continued momentum for positive demand. We also believe that all the positive catalysts are taken into consideration at the current level leaving limited scope for further upside.  

Agreement - Estimate Revisions

In the last seven days, the estimates for Navigant’s upcoming quarter did not budge and over the last 30 days two analysts out of seven, slashed the same while one moved in the opposite direction. The magnitude was pegged at 19 cents for the upcoming quarter.

Navigant, which competes with the likes of Gartner Inc. (IT - Snapshot Report) and Stantec Inc. (STN - Snapshot Report) currently, retains a Zacks #2 Rank that translates into a short-term Buy rating.

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