Tuesday, September 18, 2007

Navigant Consulting (NYSE:NCI): Color on sell-off

- Piper Jaffray comments on Navigant Consulting (NYSE:NCI) after the co postponed its investor day to allow more time to assess restructuring activities and also moved up its Q3 release by a week to October 17.

Piper believes this was done for acouple of reasons. The co's new CFO needs more time to fully develop andquantify cost cutting measures, and was weary of holding a conference a week before the books close. The co noted continued weakness in its Disputes and Investigative practice similar to Q2 and also mentioned that business from Subprime engagements was unlikely to pick up until the end of 2007. As a result they are tweaking down their assumptions by 2 cents for Q2 and by 3 cents for Q3. When PJ upgraded the stock a month ago they expected it would take until the end of Q3 for subprime business to materialize, it now appears NCI will not book incremental revenues from these engagements until 2008.

The firm is maintaining their Street high estimates for 2008. If the subprime issue blows over without additional lawsuits and regulation, then the estimates are likely aggressive. However, better expense controls alone should get the stock moving in the right direction and if subprime spawns the level of litigation and regulation seen in 2003-2004 from mutual fund timing and biased investment research investigations, then the estimates could prove conservative.

NCI shares are currently trading at 11X PJ 2008 EPS estimates. Firm maintains their Outperform rating and $21 tgt.

Notablecalls: Looks like the Dutch auction repurchase at $20.50 per share wasn't exactly money well spent. Right now, at the heart of the demand issue for the co is the lack of an obvious macro stimulant like we had seen from the Spitzer era and Sarbanes-Oxley legislation.

Yet, is there really any doubt in investors' minds that the subprime mess will unwind itself without any need for investigations etc? There is no doubt in my mind that NCI will start to benefit from the subprime market meltdown over the next couple of quarters.

They are cutting costs, business will improve gradually and we have almost all the analysts negative /cautious on the name. Merrill Lynch is slashing their rating to Neutral from Buy as I write this.

I expect NCI stock to get hit some more today but I'd be watching for a bounce below the $13 level. The closer it opens to the $12 level, the more comfortable I'd be buying it.

Not making an actionable call here. Just my 2 cents on the situation. And PJ's.

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