Korn Ferry (KFY): Buy, Sell, or Hold Post Q2 Earnings?

Korn Ferry has been treading water for the past six months, recording a small return of 1.6% while holding steady at $64.70. The stock also fell short of the S&P 500’s 21% gain during that period.

Is there a buying opportunity in Korn Ferry, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Is Korn Ferry Not Exciting?

We're swiping left on Korn Ferry for now. Here are three reasons there are better opportunities than KFY and a stock we'd rather own.

1. Revenue Tumbling Downwards

Long-term growth is the most important, but within business services, a stretched historical view may miss new innovations or demand cycles. Korn Ferry’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1.3% over the last two years.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Korn Ferry’s revenue to rise by 2.7%. Although this projection implies its newer products and services will catalyze better top-line performance, it is still below average for the sector.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Korn Ferry’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Korn Ferry’s business quality ultimately falls short of our standards. With its shares lagging the market recently, the stock trades at 12.3× forward P/E (or $64.70 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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