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We are maintaining our long-term Neutral recommendation on CRA International Inc. (CRAI - Analyst Report), a provider of legal, regulatory, business consulting and other expert services through its specialized consultants across the globe.
After two consecutive quarters of missing, CRA International’s third quarter 2012 adjusted earnings of 27 cents per share beat the Zacks Consensus Estimates by a penny. The results were aided by the improved performance of the management consulting business and the completion of a majority of the planned restructuring initiatives.
Despite a slow start in the beginning of 2012, the demand for the company’s management consulting segment improved in the third quarter of 2012, driven by the Marakon practice, which returned to positive year-over-year growth. Management noted that although economic uncertainty has generally left clients cautious about starting large consulting engagements, nonetheless the company won some new engagements.
Going forward, the performance of the segment should improve further with the closing of the chemicals practice and the Middle East operations, which have been struggling quite a bit lately.
The company also completed a majority of its planned restructuring initiatives in the third quarter of 2012. CRA International eliminated two underperforming management consulting businesses, one Chemical practice and one Middle East operation. CRAI repositioned a few selected underperforming practices as well.
These restructuring actions resulted in the reduction of more than 60 consulting positions. CRA International estimates an annualized cost saving of approximately $17 million from these restructuring actions.
Additionally, the company remains on track to curtail its SG&A expenses by reducing its administrative staff, eliminating excess office space capacity, better rationalizing the remaining office space and lowering its administrative spending, particularly related to outside contractors and professional fees.
The majority of these actions are expected to be executed by the end of fiscal 2012 and is estimated to generate annualized savings of approximately $8 million. Based on restructuring initiatives, CRA International expects to achieve double-digit growth in adjusted operating margin by the fourth quarter of 2012.
Additionally, the company anticipates its profitability to improve $15 to $17 million on an annualized basis, once activities like consulting staff reductions, repositioning of select underperforming practices and lowering of SG&A costs are fully executed. The company’s balance sheet continues to remain strong with no long-term debt.
Moreover, the company’s litigation business remains firm based on strong lead flow, an improved conversion rate and project start-ups. Its growth initiatives and healthy cash balance with no long-term debt augur well.
However, we remain concerned about the ongoing economic uncertainty in Europe, as clients, particularly of the overseas markets remain uncertain. We expect the overall performance, particularly in the international market to continue to be weak in 2012, until conditions in Europe improve.
Moreover, the market for economic, litigation support and management consulting services is intensely competitive, highly fragmented, and subject to rapid changes. Since an entry into this market is relatively easy, the company has to compete with the new entrants. Additionally, lower spending by clients and currency fluctuations make us skeptical.
Agreement of Estimate Revisions
In the last 30 days, the estimates have not budged, implying that the analysts reaffirm their view on the stock.
Magnitude of Estimate Revisions
Over the last 30 days, earnings estimates remained unchanged at 36 cents and 91 cents for the fourth quarter and 2012, respectively.