FTI Consulting: A Value Investor's Assessment of a Cyclical Business with a Durable Moat

FTI Consulting operates a classic high-quality service business, built on a foundation of specialized expertise in crisis management and advisory. Its core model is one of recurring, high-value engagements, where clients turn to the firm for clarity during periods of disruption. This is not a commodity provider; it is a partner in navigating complexity, offering industry-specialized strategy, forensic analysis, and communications solutions. The firm's historical track record demonstrates this model's power to compound value over long cycles, with its stock having gained 469% over the past decade and 55% over the past three years. This performance reflects a durable competitive moat, earned through deep industry knowledge and a pragmatic, execution-focused approach.

Yet, this is a cyclical business. The firm's revenue and earnings are sensitive to the broader economic environment and the frequency of corporate distress events. The recent first quarter of 2025 laid bare this vulnerability. Revenue for the period came in at $898.3 million, a decline of 3% from the prior year quarter. More notably, net income fell by 25% to $61.8 million, pressured by a $25.3 million special charge for restructuring costs. The weakness was concentrated in two key segments: Economic Consulting and Corporate Finance & Restructuring saw lower revenues, which was only partially offset by strength in other areas.

This sets up the current investment test. For a patient value investor, the firm's long-term compounding history provides a margin of safety. The question now is whether the cyclical downturn is deepening or merely a temporary pressure point. The recent financials show a business facing headwinds, but one that continues to generate substantial cash flow and maintain a solid adjusted EBITDA margin. The moat remains intact, but the investor must assess if the current price offers sufficient room for error as the cycle turns.

Financial Quality and Capital Allocation

The quality of FTI Consulting's earnings reveals a business sensitive to project mix and bill rates, a characteristic of its service model. The first quarter of 2025 showed this clearly, with revenue falling $30.3 million, or 3.3% year-over-year. The weakness was concentrated in two of its core segments, Economic Consulting and Corporate Finance & Restructuring. Yet, the company's operational leverage helped cushion the blow. The adjusted EBITDA margin actually improved to 12.8% of revenues from 12.0% a year ago, driven by higher success fees and bill rates in other areas that offset the lower segment revenues. This demonstrates management's ability to navigate a challenging mix and protect profitability.

Zooming out to the third quarter, the trend of margin expansion is more pronounced. Revenue hit a record $956.2 million, up 3% from the prior year. More importantly, the adjusted EBITDA margin jumped to 13.7% of revenues, a significant improvement from 11.1% a year earlier. This widening margin is the hallmark of a high-quality business: it shows that as revenue grows, the company is able to scale its operations efficiently, turning more of that top-line growth into bottom-line profit. The cash flow from operations, while down slightly year-over-year, remained robust at $201.9 million for the quarter, providing the fuel for capital allocation.

Management's capital allocation discipline is evident in its consistent use of cash for share repurchases. The company has been a steady buyer, repurchasing shares at an average price of $164.18 per share in the third quarter alone. This commitment was reinforced in April 2025 with a $400 million increase in the share repurchase authorization, bringing the total program authorization to $1.7 billion since its inception. The board's action signals confidence in the stock's value and a preference for returning capital to shareholders over organic growth in a soft quarter.

Yet, the repurchase program is a tool for capital return, not a substitute for underlying revenue growth. In the first quarter, the company used $186.1 million of its cash flow to buy back shares, a significant outflow that contributed to a decline in its cash balance from over $660 million at year-end to $151 million by quarter-end. This underscores a key point: the firm's financial strength is built on its ability to generate cash from operations, which then funds both growth initiatives and shareholder returns. The recent capital allocation is prudent, but the long-term compounding story depends on the cyclical business regaining its footing and driving top-line expansion once more.

Valuation and the Margin of Safety

For a value investor, the current price of FTI Consulting presents a classic dilemma. The trailing price-to-earnings ratio stands at 22.2, a figure that is elevated relative to both its own historical averages and the typical multiples seen in the professional services sector. This premium reflects the market's recognition of the firm's durable moat and long-term compounding history. Yet, it also leaves little room for error in the face of the business's inherent cyclical nature.

The firm's core services-advisory, restructuring, and economic consulting-are a double-edged sword. They create periods of depressed earnings during economic downturns, which can be bought at a discount, but they also introduce significant risk. A prolonged economic slowdown or a deep recession would depress demand for these services, directly testing the durability of the competitive moat. The recent first-quarter results, with revenue down 3% and net income falling 25%, are a tangible example of this pressure. The market is pricing in the current cyclical weakness, but the elevated P/E suggests it is not pricing in a severe or extended downturn.

From a value perspective, the key is whether the current price offers a sufficient margin of safety. The firm's ability to compound over decades provides a foundation, but the margin of safety is eroded when the multiple is high. The investor must weigh the quality of the business against the quality of the price. Buying a high-quality, cyclical business at a premium multiple is a bet on a quick and sustained recovery in earnings. It is a less patient strategy than the classic value approach of buying quality at a discount.

The bottom line is that FTI Consulting remains a business worth owning for the long term. Its moat is real, and its capital allocation discipline is sound. However, for a value investor seeking a margin of safety, the current valuation requires a higher degree of conviction in the cyclical rebound than a lower multiple would. The stock is not cheap, and the risk of earnings being pressured for longer than expected is a material one.

Catalysts and What to Watch

For a value investor, the path forward hinges on three key catalysts that will validate or challenge the thesis of a durable moat and long-term compounding. The first and most immediate is a sustained recovery in the firm's cyclical core. The recent first-quarter weakness was concentrated in Economic Consulting and Corporate Finance & Restructuring. A return to top-line growth would signal the cyclical downturn is bottoming, stabilizing margins and reigniting the business's historical growth trajectory. The third-quarter results provided a positive sign, with those very segments posting record quarterly revenues. The investor must watch for this strength to persist and broaden, as it is the fundamental driver of intrinsic value creation.

The second catalyst is the firm's integration of artificial intelligence. This is not a near-term earnings driver but a critical determinant of its long-term competitive position. The technology is reshaping industries, and companies that deploy it at scale are fundamentally rewiring how value is created and captured. For FTI, AI could enhance forensic analysis, automate routine consulting tasks, and create new, higher-margin service offerings. While the company has not yet detailed a specific AI roadmap, its success in leveraging these tools to improve efficiency and expand its addressable market will be a key factor in widening its moat over the next decade. The firm's own survey suggests AI's potential to drive significant value creation, making this a trend worth monitoring.

Finally, the company must navigate a complex global environment. Geopolitical and macroeconomic tensions have surged to levels not seen in over three decades, with trade realignments and inflationary pressures creating uncertainty. These forces directly impact corporate distress events and M&A activity, the lifeblood of FTI's core businesses. The investor must assess whether management can steer the firm through this turbulence, protecting cash flow and capital allocation discipline. The firm's ability to adapt its global operations to shifting regulatory landscapes and regional economic cycles will be tested.

Viewed through a value lens, these catalysts underscore the need for patience. The cyclical recovery is the near-term validation of the business model. AI integration is the long-term moat-builder. And geopolitical navigation is the essential backdrop for any compounding story. The investor's role is to monitor these developments, ensuring the company's execution aligns with its durable foundation.