Markets & Finance

Merrill Cuts Ratings on Two Consulting Firms


Merrill Lynch downgraded Heidrick & Struggles (HSII) and Korn/Ferry International (KFY) to near-term reduce from neutral.

Analyst Thatcher Thompson says these two consultancy firms are at risk of losing money on an operational basis over the next three quarters. He drastically cut Heidrick & Struggles' 2001 EPS estimate to $0.35 and cut the 2002 estimate to $1.05. Thompson says Heidrick & Struggles' actual results will be highly variable based on revenue and the effects of the company's additional headcount reductions. He thinks Heidrick & Struggles' shares could fall to 15 times the new 2002 EPS estimate, or $16 per share, a more appropriate valuation.

However, he believes the company can generate 10%-15% organic revenue growth over the next five years, and the stock will trade at a price-to-earnings multiple in line with the growth rate. Thompson maintains his long-term accumulate rating.

At Korn/Ferry, Thompson thinks the downturn could be longer and weigh more heavily on earnings than most investors realize. He cut the $0.65 fiscal 2002 (April) EPS estimate to $0.44, and cut the $0.83 fiscal 2003 to $0.65. He notes cyclical problems with the industry are evident as U.S. and European economies continue to slow, but thinks Korn/Ferry's structural problems are just coming to light. He thinks the stock could fall to a multiple of 15 times the new fiscal 2003 EPS estimate, or $10 per share.


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