Tuesday, April 06, 2010

Huron Consulting Group (NASDAQ:HURN): Upgrading to Outperform on Better-Than-Expected Retention Post Bonus Payments - Baird

Baird is making an interesting call on Huron Consulting Group (NASDAQ:HURN) upgrading the name to an Outperform from Neutral and raising their price target to $30 (prev. $27).

Firm notes they are upgrading HURN to Outperform on improved visibility on management’s retention efforts succeeding in keeping the vast majority of core H&E Directors and MDs. Additionally, their 1Q10 consulting survey showed continued stabilization in the more cyclical segments, with consultants pointing to the recently passed Healthcare bill potentially causing various entities to adjust business processes, thus creating an additional source of engagements.

Baird notes that when HURN first announced the financial restatements, the company had roughly 170 MDs and 230 Directors. Since that time, they believe 37 MDs and 32 Directors have departed or have been let go, with only 4 MDs in H&E and 4 MDs in Legal Consulting having departed. On the Director side, out of the 32 departures, the firm believes 10 were part of Legal or H&E practices.

For perspective, the vast majority of HURN billable employees (78%) are part of the Legal and H&E practices. The majority of the departures have occurred in the Financial and the Corporate consulting segments, which we expect to contribute less than 20% of HURN’s 2010 revenues and EBITDA. If management made the decision to entirely exit the Financial Consulting business, it would only add approximately 0.7x 2010E EV/EBITDA to the current multiple.

- Retention remains the key. Previously, Baird notes they stated that HURN’s largest hurdle was retention of MDs in core segments (Health and Education and Legal) after bonus payments were made following the 4Q09 earnings release. While some post-bonus turnover has occurred, the number of departures appears to be quite a bit below their initial estimates.

- Post bonus departures lower than feared. Baird believes HURN had 148 MDs and 206 Directors prior to bonus payouts. Over the 5-6 weeks which have elapsed since, HURN has seen 5 MDs leave (2 in H&E and 1 in Legal) as well as 10 Directors (4 in Legal and 3 in H&E). Of note, one of the H&E MDs was hired only a month before
the restatement.

- Valuation gap likely to close. HURN is trading at a 5.2x 2010 EV/EBITDA, a 2 point discount to its peers. They believe this gap could potentially close over the next couple of quarters as it becomes clear that management’s retention efforts focused on the core segments have succeeded. If investors gain confidence in the retention efforts, they believe the stock could enjoy significant upside

Baird says their $30 price target represents 7x 2010E EV/EBITDA. This represents a significant discount to the historical 10.4x average, but in line with the peer group which currently trades at 7-7.5x 2010E EV/EBITDA, as they believe that the peer valuation discount owed to employee retention risks will likely close.

Notablecalls: Well hello old friend. Last time we met you were in a bit of a blunder. Looks like you have got your house in order again, haven't you? That's nice.

The thing is, HURN's a mover and Baird blesses it with a very nice upside price target.

I think HURN can trade up 2pts+ (around 10%) on this, putting $23 level in play.

I may be a bit overly optimistic here as HURN is a thin name and won't attract the real big money players but it's interesting enough to warrant attention.

Let's see how it works out.

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