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Tickers in this Article: CRAI, ACN
Are you finding that understanding securities regulations is becoming a jungle that must be forged through when doing research and selecting suitable investments? Is your favorite financial magazine filled with talk of private equity buyouts and mergers & acquisitions?
In our higher minds we can appreciate that increased regulations are generally good for equity investors by protecting shareholder interests – but understanding them, and keeping up with myriad changes from year to year become chores for many investors.
You Are Not Alone!
Those same frustrations are felt by the companies themselves. Say the words "Sarbanes-Oxley" to any high-level manager of a public company, and you'll likely get the standard response of a furrowed brow and a heavy sigh as they think about all the hours upon hours spent working to fulfill SOX requirements.

But as tired as the saying is, it remains true. One man's loss generally is another's gain.
And in this case, a big gainer is Charles River International (Nasdaq: CRAI), an economic, strategic, and legal consulting firm that provides a vast array of services to many of the largest companies in the S&P 500. Charles River specializes in complex engagements like mergers & acquisitions, patent litigation, and commodities contracts; they essentially aim to put out the strategic fires that naturally occur at large companies as they operate in ever-global marketplaces.

Respected Credentials for Hire
To this end, Charles River's has almost 1,000 employees that possess expertise from dozens of industries and functional groups; they even have 47 industry experts "on retainer" that are brought in like pinch hitters when a high-profile client wants to see a respected industry leader on their team.

Charles River
's excellent reputation as corporate problem-solvers has made their phone number one found in the Rolodexes of many Fortune 500 CEOs. In fact, many of CRAI's largest clients have been using the firm consistently for many years and on a wide array of projects.

Experienced as they are in their fields, top-level managers at large companies often need to collect advice from experts in different industries to aid in mission-critical objectives such as due diligence on a potential acquisition, or possibly protecting intellectual property within the company.

Recent Performance

Charles River reported fiscal 1st quarter numbers last week for the 12-week period ending February 16, 2007. Revenue came in at $83.3 million, up 15% year-over-year, while net income was just over $7 million, up 25% from 2006 levels.

"Utilization" within the company, or the percentage of total available man-hours that are billed to clients during the quarter, came in at 77%, which is essentially changed from 2006's 78% level. Management has stated that the company-wide goal is 80%, in line with general industry trends.

Gross margins fell to 38% from 39.1% in the prior-year period, a reflection of "increased competition in the marketplace", according to the company's latest quarterly filings. In addition to hundreds of small private firms that may compete with Charles River for specific projects, there are plenty of larger competitors who offer similar levels of expertise; stalwarts such as Accenture (NYSE: ACN) and McKinsey are around every corner and are much large than CRAI's $600 million market cap.

A Race to Span the Globe

International revenue grew as a percentage of Charles River's total, measuring 27% in the latest quarter versus 19% in 2006. Most of this increase was attributable to a 100% increase in revenues from the company's petroleum and chemicals practice; as one might expect the client list for this segment of the company is largely based in the Middle East.

Revenue increases came from both organic growth (including 6% price increases) and via acquisition, where the company has been particularly active, buying up several small private consulting firms in the past few years. Charles River's international focus also shows up in the company's acquisition history, as most of the purchases have been made overseas.

Future Prospects

While CRA's growth is irrevocably tied to the overall economy, their revenue is specifically sensitive to changes in business spending, an area that may remain steady even if consumer spending drops off in the second half of this year, which is currently a big concern on Wall Street.

The high-level consulting business is still largely fragmented, leaving Charles River plenty of room to grow through acquisition

One concern worth noting for CRAI stock is how much the value of the company is tied to human capital.Charles River operates on a very "asset-light" business model; if a few key people left the company or were raided away, big clients could decide to take their business elsewhere.


Investors should also pay attention to margin trends over the next few quarters, as integrating multiple acquisition can catch up with even the best management teams, and maintaining the quality of the brand is absolutely vital.

CRAI
's balance sheet is solid, with the $90 million in long-term debt actually representing a convertible note on very favorable terms. Stock options have been dilutive in the past few years, but the company has prior authorization to repurchase another 250,000 shares, about equal to the amount repurchased in 2006.

CRAI
stock currently trades at $51.61, near the top of its 52-week range of $41.50 - $54.94, and goes for just 16x forward estimates, in line with earnings estimates for 2007 and 2008.

But with corporate cash balances at record highs, and earnings growth forecast to slow for the S&P 500 this year, look for companies to increasingly seek out strategic advice from the likes of Charles River.

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