BUSINESS
Heidrick & Struggles International, Inc., together with its subsidiaries, provides executive search, consulting, and on-demand talent services to businesses and business leaders worldwide. The company enables its clients to build leadership teams by facilitating the recruitment, management, and development of senior executives. It also offers on-demand services to provide clients with independent talent, including professionals with industry and functional expertise for interim leadership roles and critical project-based initiatives; and consulting services, including leadership assessment and development, team and organization acceleration, digital acceleration and innovation, diversity and inclusion advisory services, and culture shaping services.
INVESTMENT RATING
HSII is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Heidrick & Struggles Internation has a current Value Trend Rating of B (Positive).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing highly consistent signals. Heidrick & Struggles Internation has a slightly positive Power Rating of 65 and a slightly positive Appreciation Score of 69, leading to the Positive Value Trend Rating.
Heidrick & Struggles Internation’s stock is selling well below targeted value. The current stock price of $28.95 compares to targeted value 12 months forward of $59.
This moderately high appreciation potential results in an appreciation score of 69 (only 31% of the universe has greater appreciation potential.)
Heidrick & Struggles Internation has a Power Rating of 65. (This slightly positive Power Rating indicates that HSII’s chances of achieving attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly positive Power Rating include: recent price action has been favorable; and earnings estimate behavior for HSII has been slightly favorable recently. An offsetting factor is the Employment Agencies comparison group is in an extremely unfavorable position currently.
INVESTMENT PROFILE
HSII’s financial strength is high. Financial strength rating is 81.
Relative to the S&P 500 Composite, Heidrick & Struggles Internation has neutral Growth/Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that HSII is lower risk. High earnings variability is a relative weakness for HSII. HSII’s valuation is low: moderate dividend yield, low P/E ratio, and low price/book ratio. HSII has unusually low market capitalization.
CURRENT SIGNALS
Heidrick & Struggles Internation’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.
Heidrick & Struggles Internation’s current technical position is very strong. The stock price is in a 3.3 month up move. The stock has appreciated 27.0% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
In light of this new information we are reviewing our current Overall Rating of B. This review will be completed in the next several days.
Heidrick & Struggles Internation (NASDAQ: HSII) has reported E.P.S. of $0.74 for its fourth fiscal quarter (ending December 31) versus $0.81 for the same period a year ago — a decline of -9%. Relative to the consensus estimate of $0.69, this was a premium of $0.05. For the latest four quarters through December 31, E.P.S. were $2.72 compared to $4.02 a year ago — a decline of -32%.
Heidrick & Struggles Internation (NASDAQ: HSII) stock closed at $28.95 on 2/26/24 after a decline of -2.0%. Moreover, trading volume in this decline was unusually high at 183% of normal. The stock has declined -2.9% during the last week but has been strong relative to the market over the last nine months.
CASH FLOW
In 2022, Heidrick & Struggles Internation generated a significant increase in cash of +$76.4 million (+14%). Sources of cash were larger than uses. Cash generated from 2022 EBITDA totaled +$127.1 million. Non-operating uses consumed -$1.3 million (-1% of EBITDA). Cash taxes consumed -$35.4 million (-28% of EBITDA). Re-investment in the business amounted to -$7.1 million (-6% of EBITDA). On a net basis, debt investors received -$2.1 million (-2% of EBITDA) while equity investors pulled out -$4.9 million (-4% of EBITDA).
HSII’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Heidrick & Struggles Internation Peer Group. (Since 2020 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, Heidrick & Struggles Internation was in the second quartile and third quartile. Currently, Heidrick & Struggles Internation is above median at -1% of EBITDA (-$1.3 million).
HSII’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Heidrick & Struggles Internation Peer Group. (Since 2020 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, Heidrick & Struggles Internation was in the lower quartile and third quartile. Currently, Heidrick & Struggles Internation is lower quartile at -28% of EBITDA (-$35.4 million).
HSII’s Business Re-investment, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Heidrick & Struggles Internation Peer Group. In most years, Heidrick & Struggles Internation was in the top quartile and second quartile. Currently, Heidrick & Struggles Internation is upper quartile at -6% of EBITDA (-$7.1 million).
HSII’s Debt Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Heidrick & Struggles Internation Peer Group. In most years, Heidrick & Struggles Internation was in the third quartile and top quartile. Currently, Heidrick & Struggles Internation is substantially below median at -2% of EBITDA (-$2.1 million).
HSII’s Equity Investors, %EBITDA has exhibited a minor overall uptrend over the period. This improvement was accompanied by stability for the Heidrick & Struggles Internation Peer Group. In most years, Heidrick & Struggles Internation was in the top quartile and second quartile. Currently, Heidrick & Struggles Internation is above median at -4% of EBITDA (-$4.9 million).
HSII’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Heidrick & Struggles Internation Peer Group. In most years, Heidrick & Struggles Internation was in the top quartile and lower quartile. Currently, Heidrick & Struggles Internation is at the upper quartile at +60% of EBITDA (+$76.4 million).
HSII’s Cash, %Revenue has enjoyed a strong overall uptrend over the period. This improvement was accompanied by stability for the Heidrick & Struggles Internation Peer Group. In most years, Heidrick & Struggles Internation was in the top quartile. Currently, Heidrick & Struggles Internation is upper quartile at +57%.
PROFITABILITY
HSII’s return on equity has improved very significantly since 2013. The current level of 12.7% is 4.94X the low for the period and is -31.4% from the high.
A major analytical focus for HSII is a strong positive trend in pretax operating return significantly augmented by a very strong positive trend in non-operating factors.
The productivity of HSII’s assets remained stable over the full period 2013-2023: asset turnover has exhibited little to no overall change.
Additionally, pretax margin has exhibited a volatile overall uptrend even as it experienced a very sharp decline after the 2022 high.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
HSII’s return on equity is below median (12.7%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is above median (8.3%) reflecting asset turnover that is lower quartile (0.98X) and substantially above median pretax margin (8.5%).
Tax “keep” rate (income tax management) is lower quartile (64.2%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is at median (2.37X).
GROWTH RATES
There are no significant differences between Heidrick & Struggles Interna’s longer term growth and growth in recent years.
Heidrick & Struggles Interna’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.
Annual revenue growth has been 7.2% per year.
Total asset growth has been 7.4% per year.
Annual E.P.S. growth has been 28.0% per year.
Equity growth has been 4.7% per year.
Heidrick & Struggles Interna’s consensus growth rate forecast (average of Wall Street analysts) is 16.0% — above the average of the historical growth measures.
Relative to the Heidrick & Struggles Internation Peer Group, Heidrick & Struggles Internation historical growth measures are generally second quartile. E.P.S. growth (28.0%) has been upper quartile. Total asset growth (7.4%) has been above median. Revenue growth (7.2%) has been above median. Equity growth (4.7%) has been slightly above median.
Consistent with this pattern, consensus growth forecast (16.0%) is also upper quartile.
PRICE HISTORY
Over the full time period, Heidrick & Struggles Internation! stock price performance has been volatile and below market. Between April, 2013 and February, 2024, Heidrick & Struggles Internation! stock price rose +119%; relative to the market, this was a -31% loss. Significant price moves during the period: 1) September, 2020 – October, 2021: +139%; and 2) July, 2017 – August, 2018: +144%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -0.4% is slightly below median relative to the S&P 500 Composite.
In addition to being slightly below median relative to S&P 500 Composite, current annual total return performance through January, 2024 of -0.4% is lower quartile relative to Heidrick & Struggles Internation Peer Group.
Current 5-year total return performance of 0.1% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of 0.1% relative to S&P 500 Composite, Heidrick & Struggles Internation total return performance is lower quartile relative to Heidrick & Struggles Internation Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, HSII’s overall valuation is exceptionally low. All five factors are lower quartile. The highest factor is the price/earnings ratio, followed by the price/equity ratio, then by the ratio of enterprise value/assets, then by the ratio of enterprise value/earnings before interest and taxes. The lowest factor is the ratio of enterprise value/revenue.
Relative to Heidrick & Struggles Internation Peer Group, HSII’s overall valuation is exceptionally low. Four of five factors are lower quartile. The highest factor is the price/earnings ratio, followed by the price/equity ratio, then by the ratio of enterprise value/revenue, then by the ratio of enterprise value/assets. The lowest factor, ratio of enterprise value/earnings before interest and taxes, is lower quartile.
Heidrick & Struggles Internation has a major value gap compared to the median. For HSII to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.64X to 1.10X. If HSII’s ratio of enterprise value/revenue were to rise to 1.10X, its stock price would be higher by $23 to $52.
For HSII to achieve upper quartile valuation relative to the Heidrick & Struggles Internation Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.64X to 1.45X. If HSII’s ratio of enterprise value/revenue were to rise to 1.45X, its stock price would increase by $41 from the current level of $29.
VALUE TARGETS
HSII is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Heidrick & Struggles Internation current Price Target of $59 represents a +103% change from the current price of $28.95.
This moderately high appreciation potential results in an appreciation score of 69 (only 31% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 69, the moderately high Power Rating of 65 contributes to an Value Trend Rating of B.
Heidrick & Struggles Internation current Price Target is $59 (+11% from the 2022 Target of $53 and +103% from the 02/26/24 price of $28.95). This slight rise in the Target is the result of a +21% increase in the equity base and a -8% decrease in the price/equity multiple. The forecasted decline in cost of equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a slight positive impact as well. More than offsetting these Drivers, the forecasted decline in return on equity has a very large negative impact.
PTR’s return on equity forecast is 12.6% — below our recent forecasts. Forecasted return on equity enjoyed a dramatic, steady increase between 2014 and 2022. The current forecast is well above the 2014 low of 4%.
PTR’s growth forecast is 12.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2016 and 2022. The current forecast is significantly above the 2017 low of 2%.
PTR’s cost of equity forecast is 9.1% — slightly below recent levels. Forecasted cost of equity suffered a dramatic, steady increase between 2014 and 2022. The current forecast is well above the 2014 low of 3.3%.
At Heidrick & Struggles Internation! current price of $28.95, investors are placing a positive value of $5 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 10.0% per year, and a return on equity of 17.1% versus a cost of equity of 11.3%.
PTR’s 2024 Price Target of $59 is based on these forecasts and reflects an estimated value of existing assets of $36 and a value of future investments of $22.
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