3 Reasons FCN is Risky and 1 Stock to Buy Instead

Over the past six months, FTI Consulting’s shares (currently trading at $167.67) have posted a disappointing 17.2% loss while the S&P 500 was down 1.9%. This might have investors contemplating their next move.

Is now the time to buy FTI Consulting, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is FTI Consulting Not Exciting?

Even with the cheaper entry price, we're swiping left on FTI Consulting for now. Here are three reasons why you should be careful with FCN and a stock we'd rather own.

1. 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 FTI Consulting’s revenue to rise by 1.3%, a deceleration versus its 8.6% annualized growth for the past two years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Analyzing the trend in its profitability, FTI Consulting’s adjusted operating margin decreased by 2.8 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 8.9%.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, FTI Consulting’s margin dropped by 5.6 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. FTI Consulting’s free cash flow margin for the trailing 12 months was 4.3%.

Final Judgment

FTI Consulting isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 20.8× forward P/E (or $167.67 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of our top digital advertising picks.

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