FTI Consulting's Resilience Amid Global Economic Turbulence: A Case for Caution

The 2008 financial crisis tested the resilience of countless firms, but FTI Consulting (NYSE: FCN) emerged as a standout performer, leveraging its diversified services to capitalize on sector-specific demand. While the firm's financial outperformance in 2007 and 2008 underscores its strategic agility, investors must weigh its valuation against growth prospects before committing. This analysis explores whether FTI's “Hold” rating remains justified.

Financial Resilience: Growth Amid Crisis

FTI's 2007 results set the stage for its crisis-era success. Revenue hit $1.0 billion, with EBITDA rising 40.9% to $216 million, driven by robust performance across all segments. Forensic and litigation consulting, economic advisory, and corporate restructuring services all expanded, reflecting FTI's ability to monetize pre-crisis regulatory scrutiny and early signs of economic strain.

By 2008, the credit crisis amplified demand for restructuring and dispute resolution services. FTI's revenue surged 29% to $1.29 billion, with EBITDA climbing 31% to $283 million. Notably, its Corporate Finance/Restructuring segment grew 45.7% in Q4 2008 alone, fueled by sectors like financial services and real estate. Even its Strategic Communications segment—though hampered by currency headwinds—contributed to FTI's diversified revenue streams.

Segment-Specific Demand Drivers

FTI's success hinges on its five core segments, each of which capitalized on crisis-era opportunities:

1. Forensic & Litigation Consulting:
   This segment grew 12.3% in 2007 and 6.9% in Q4 2008, driven by Foreign Corrupt Practices Act (FCPA) investigations and litigation tied to complex financial instruments. While margins dipped slightly due to softer regulatory enforcement during the U.S. presidential transition, demand rebounded post-2009 as fraud investigations and regulatory actions intensified.

2. Economic Consulting:
   The segment thrived, with 21.1% annual revenue growth in 2007 and a 19.5% jump in Q4 2008. Antitrust disputes and credit crisis-related litigation fueled demand, with clients seeking expertise in valuation and regulatory compliance.

3. Corporate Finance/Restructuring:
   This became the crisis-era star, growing 23% in 2007 and 45.7% in Q4 2008. FTI's role in advising distressed industries—from automotive to real estate—highlighted its value as a “crisis manager” for capital-strapped firms.

Valuation Metrics: Overpriced for Growth?

Despite its resilience, FTI's valuation may outpace its near-term prospects.

• P/E Ratio: In late 2008, FTI traded at a P/E of ~20x, above the average for consulting peers. With 2009 EPS guidance of $2.55–2.70, the stock's forward P/E would remain elevated unless growth accelerates.
• EBITDA Margins: While margins improved to 21.9% in 2008, they faced pressure in forensic services and technology segments due to currency swings and R&D spending. Sustaining margin expansion requires operational discipline.

Risks and Cautionary Notes

1. Macroeconomic Sensitivity: FTI's services are cyclical. A prolonged recession or market rebound could reduce demand for restructuring and litigation support.
2. Currency Headwinds: Strategic Communications' 2008 revenue drop (to $51.6M from $60M) highlighted vulnerability to foreign exchange fluctuations.
3. Margin Pressures: Forensic and Technology segments faced margin declines in 2008, signaling execution risks as FTI scales.

Investment Thesis: A “Hold” Rating

While FTI's crisis-era performance is commendable, its valuation and macro dependency warrant caution. Key takeaways:
- Strengths: Diversified service lines, strong cash flow ($200M in 2008), and strategic global expansion.
- Weaknesses: Overvaluation relative to 2009 growth guidance, cyclical revenue streams, and margin volatility.

Investors should consider FTI a “Hold” unless its stock price corrects or macro risks subside. A “Buy” case would require evidence of margin stabilization or secular demand shifts beyond cyclical crises.

Conclusion

FTI Consulting's resilience in 2008 underscores its ability to navigate turbulent markets, but its valuation and reliance on macroeconomic cycles argue against aggressive investment. Monitor P/E multiples and EBITDA margin trends closely—until FTI demonstrates sustainable growth beyond crisis-driven demand, prudence prevails.