Markets & Finance

Has Korn/Ferry Hit the Ceiling?


Based on the recent strength of Korn/Ferry International (KFY) shares, many investors would no doubt give the headhunter high marks in a performance review. Shares of the executive and middle-management search outfit brushed $23.18 on Oct. 17, their highest level since May, 2001. What's behind the strong showing? Analysts attribute the performance to a combination of strong management by the company and macroeconomic factors like low unemployment.

Indeed, in a recent conference call with analysts, the company crowed about the falling U.S. jobless rate, and, more specifically, even lower unemployment in the job market for white-collar workers and those with a college degree, which increases demand for its services. It also highlighted falling unemployment in Britain and Europe, where the company has a large presence. But amid the positive news, analysts disagree on whether investors will be able to squeeze much more juice out of the company, at least in the short term.

Just a few years ago, the shares were underemployed. Following the September 11 terrorist attacks, the stock wallowed in the doldrums, spending much of 2002 and 2003 in the single-digit price range. But as job growth has returned—albeit not as robustly as some would like—and the Dow has reached new heights, Korn/Ferry was well-positioned for the ride.

Database Management The Los Angeles-based outfit recruits senior-level executives and middle management employees, the latter through a unit called Futurestep, which focuses on employees with salaries in the $75,000 to $150,000 range. By combining the company's recruitment expertise with a database of job-seekers, Futurestep is "pioneering the market," says SunTrust Robinson Humphrey analyst Tobey Summer. There are "hardly any global competitors to what Futurestep does," he adds. Futurestep complements Korn/Ferry's much larger executive recruitment business since employers looking for one service can end up using both.

For the quarter ended July, the company posted revenues of $161.1 million, up from $129.1 million a year earlier, with quarterly net income rising from $11.6 million to $13.7 million. Though the company has offices worldwide, it saw the greatest revenue growth in its core North America executive-recruitment division.

Analysts applaud the company's recent performance but question whether the stock has more room for growth, at least in the short term. Bulls can find encouragement in the relatively strong corporate-earnings climate, which could lead to more hiring. And at the lucrative senior levels, there's a growing need to replace retiring baby boomers.

Competitive Consultants The company is "catching a good cyclical time for the business," says Summer. Despite his enthusiasm, he rates the stock neutral. He says the company is well-positioned globally with an extensive office network across Europe and Asia.

But he doesn't see that translating into notably better profit margins. He also says that after a few good years, the executive recruiting sector as a whole is doing more promoting and hiring their recruiters from outside the industry instead of tapping more experienced headhunters. While new recruiters—Korn/Ferry calls them consultants—are a sign of a growing industry, they tend not to deliver revenue as quickly, Summer says.

Korn/Ferry no doubt owes some of its recent success to strong performance in the sector. Smaller rival Heidrick & Struggles International (HSII) is also trading near multiyear highs. But over the past five years Korn/Ferry's stock has outperformed Heidrick's. With both outfits armed with ample balance sheets, Summer speculates that they might be on the prowl for acquisitions, though probably more for secondary businesses than executive recruiting.

Labor Upturn Standard & Poor's, which has a long-standing buy rating (four stars out of five) on Korn/Ferry, says it expects revenues to climb 15% for the year ending in April. Despite this generally positive outlook, though, it cautions that the stock remains vulnerable to "the possibility of an unexpectedly weak global economy."

S&P analyst Michael Jaffe remains relatively bullish. It's a "pretty well-run company," he says, adding that "a lot of the human-resources companies are doing well because we've been in the midst of a labor upturn for past few years."

In a recent report, Korn/Ferry market-maker Merrill Lynch (MER) agrees with Summer that it doesn't see much more near-term upside for investors. And it doesn't expect the company to add a dividend soon.

While the company's prospects appear solid, the shares may not be able to climb the ladder much higher. Perhaps it's time for investors to start thinking about the exit interview.

Halperin is a reporter for BusinessWeek.com in New York.

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