Is FTI Consulting Inc. (FCN) A Smart Long-Term Buy?

"FTI is a boutique consulting firm with expertise in distress, bankruptcy, and other specialized dispute advisory services. “Long controversy and messiness” is one way to describe a position in FTI. Distress, litigation, regulatory changes, and corporate crises can all benefit FTI. The position is a virtual mirror image to Evercore. When we added Evercore one year ago, it was hard to envision the M&A market quickly turning around and thriving – just as it is hard to envision the restructuring market booming today. Yet, many of the pieces are in place to provide tailwinds for FTI in the coming years (bloated balance sheets, potentially rising rates, court re-openings, elevated potential for regulatory change, and a SPAC boom that could ultimately contribute to demand for FTI’s services).

FTI is a specialty consulting and financial advisory firm generally focused on restructuring, litigation, risk mitigation, and crisis management. Clients include large global corporates, banks, private equity funds, governments, and 96 of the top 100 law firms.

Our FTI thesis is relatively simple. Year-to-date, businesses with defensive or remotely counter-cyclical characteristics have been out of favor. While it remains challenging to predict a strong near-term outlook for restructuring, I believe the long-term outlook for FTI remains strong, as many of the pieces are in place to provide tailwinds for years to come (e.g. bloated balance sheets, potentially rising rates, court reopenings, elevated potential for regulatory change, and a massive SPAC boom that could ultimately contribute to demand for FTI’s services on the other side). Further, FTI has shown an ability to grow (modestly) regardless of environment. More specifically, our FTI thesis includes the following points:

1) Leading player in restructuring advisory; end-markets likely at short-term cyclical trough. FTI is one of the leading specialty restructuring consulting/advisory firms. Overall, the recent macro environment has provided surprisingly few tailwinds for FTI to date. However, as the economy more fully reopens, stimulus fades, and/or rates rise, it seems likely businesses will face significant change (both good/bad). Generally, change, complexity (e.g. regulatory) and conflict are good for FTI’s business. The current SPAC bubble also seems like a possible long-term opportunity for FTI.

2) Attractive model has delivered steady growth during strong macro periods and exceptional growth during times of crisis. While the core of FTI is counter-cyclical, certain pro-cyclical elements, plus a tuck-in M&A strategy, have enabled it to deliver modest growth even outside of crises. This dynamic leads me to view FTI as a perpetual, cheap call option on the distress cycle.

3) Solid competitive advantage. FTI’s services are largely focused on high-risk events that are incredibly important and “one-time” in nature for many clients (e.g. bankruptcy). This means clients are likely to select a firm with a strong reputation, such as FTI, and be less sensitive to price. FTI has delivered a relatively steady ROIC over the long-run – consistent with the thesis that the company has a defensible competitive position.

4) Scarcity value. FTI has very few publicly-traded, direct “comps.” The closest is Houlihan Lokey (HLI); however, even HLI (often viewed as a distress cycle bet) has a bit more traditional corporate finance advisory (pro-cyclical) exposure. Historically, Upslope has sought to own attractive businesses with few direct peers.

5) Attractive valuation + strong balance sheet. FTI shares trade for a 6-7% free cash flow yield (based on Upslope estimates). The company also ended 2020 with no net debt. Given the highly defensive characteristics of the business and where we seem to be in the distress cycle, this valuation seems more than reasonable, even after recent appreciation of shares.

6) Key Risks. (A) lumpy earnings (due to project-based nature of the business) combined with limited sell-side coverage = more volatile share price than typical, (B) “macro headwinds” – for FTI this means continued fiscal and monetary stimulus efforts likely to push out the distress cycle, and (C) potentially more pro-cyclical than in the past (and hard to size this precisely)."