Korn Ferry’s Valuation Is No Longer Appealing (NYSE:KFY)

imaginima I last covered Korn Ferry (NYSE:KFY) in October 2023; at the time, I put out a Strong Buy rating, and since then, the stock has gained around 40% in price, compared to 21% for the S&P 500 (SP500). Now, I consider the stock to be overvalued despite its strong fundamentals remaining intact. Analyst’s Performance The company is one of the most successful and operationally vibrant professional services firms that I know of, and so despite the current unappealing valuation, the company is still worth long-term holding. However, there are growing risks related to global multipolarity which could place a strain on Korn Ferry’s 50% U.S. revenue generation if the United States cannot continue to lead in the world economically and a broad U.S. recession begins. The outcome of current tensions is still uncertain, but the risk is significant. Talent Development, Technological Integration, And Sales Transformation There are three core areas that make Korn Ferry stand out to me and indicate that it is positioned operationally for continued long-term growth. These are talent development, technological integration, and sales transformation; although it is also excelling in other areas, too. Firstly, Korn Ferry emphasizes personalized development programs tailored to individual and organizational goals. This focus on talent development is critical because it is the people within organizations that make them successful, first and foremost, in my opinion. KFY uses science and technology to customize leadership and professional development at every level of the hierarchy, from new graduates to senior executives. Korn Ferry focuses on talent development and personalization in an effort to maximize ROI and ensure that development programs are nuanced to fit the needs of organizations. Furthermore, KFY is now leveraging AI to enhance its operations and improve the effectiveness of its programs. For example, it uses virtual reality training and digital assessment tools to provide interactive and adaptive learning experiences. KFY also has a CRM application called Korn Ferry Sell, which helps sales professionals apply what they learn in real time by giving actionable insights and data to inform coaching and development. Korn Ferry’s sales training programs are powered by the Miller Heiman Group, which is known for revolutionizing seller behavior. These programs have over four billion data points and 74 million assessment results to predict performance and better inform salespeople and managers. The company offers a comprehensive range of sales training courses, and I believe this is incredibly powerful, as one of the highest ROI segments in business is undoubtedly sales. This focus on sales will often have a tangible impact on the financials of the businesses it provides the programs for, which will lead to client satisfaction, return clients, and a more sustainable business segment. Korn Ferry’s offerings also develop the skills needed for multi-platform and hybrid sales deals, which is crucial in today’s market. Valuation Analysis, Fundamental Growth Estimates, 1Y Price Target, And Financial Considerations Clearly, KFY is strong operationally, and it became attractively valued last year due to weakness in fundamental growth. For example, its YoY revenue growth is -2.6%, and -18% for EPS GAAP growth. However, for FY 2025, we are looking at 11.6% growth in EPS and 12% for FY 2026. The market has already priced this in, and unfortunately, the value opportunity that I noticed as a Strong Buy in October of last year has now come to pass. Data by YChartsData by YCharts As a result of my analysis here, I don’t think KFY is worth buying at this time. My rating is a Hold because this company is certainly good for long-term holding, but I would not be surprised if returns were minimal over the next few years based on the present valuation. Its PE non-GAAP ratio is currently 35% higher than its 5Y average, and its PS ratio is currently 1.4% higher than its 5Y average. Seeking Alpha’s Quant allocates a C- rating to KFY’s valuation. Therefore, I think KFY is fairly valued at best or perhaps moderately overvalued. As a result of this, I think investors will be lucky if they receive a total return of 10% over the next 12 months from the investment. In a bull-case outcome, I think KFY could grow by 12% in price over the next 12 months if its PE ratio stays constant, resulting in a 1Y price target of $77. However, there is also the possibility that sentiment in the market may shift, and my bear-case 1Y price target is $62, which would be the result of a contraction in valuation multiples as the market begins to deem KFY as presently overvalued after high momentum. For understanding the culmination of the value opportunity, which does not present the same buying opportunity as when I first covered KFY in October 2023, it is worth looking at its fundamental growth performance: Data by YCharts As we can see, growth has plateaued for KFY in recent years, especially after its rebound from the pandemic. That being said, the future looks more positive, as outlined in the growth estimates above, but sentiment in the market has already shifted for KFY and priced this future growth in. Furthermore, I believe that amid fears of a wider U.S. recession looming, the present valuation of KFY is not attractive when considering that its fundamental growth could be affected by lower corporate spending as a result of tighter macroeconomic conditions. That being said, KFY is well-diversified beyond just the United States, with 44.9% of its operating revenue from other countries. This protects it somewhat from Western macroeconomic stagnation, but with the majority of revenue from the United States, the risk is still significant. Further Risks, Competitive Pressures, And Bear-Case Catalysts KFY has outlined that 70% of the most innovative companies invest more in R&D than their less innovative peers. Therefore, for KFY to stay competitive, it needs to ensure its own spending on innovation is both adequate and effective. This is particularly important during the scaling of AI, where new professional services firms that are more automated in nature could take market share from KFY. Cybersecurity will also be of paramount importance to protect the reputation of the company as new, more advanced cyber threats through AI and quantum computing capabilities become prevalent. Korn Ferry will also face pressure from competitors, including Deloitte, McKinsey, and Boston Consulting Group, as well as smaller niche boutique firms that can sometimes command outsized strength in specialized market segments. It is becoming increasingly difficult for large professional services firms to differentiate themselves, so I believe the biggest driving factor will be talent development within KFY and a focus on the specifics and nuances of the businesses it works with to execute under an ethos of quality. Furthermore, a lot of Korn Ferry’s revenue comes from its Executive Search and Advisory segments, which creates concentration risk. These segments are closely tied to economic conditions, and as I mentioned, with weakening sentiment surrounding the dollar and fears of macroeconomic stagnation or long-term recession, KFY is exposed to this risk quite severely. This is why I am beginning to look at diversifying toward Indian professional services firms for risk mitigation and global diversification at this time of growing multipolarity. Conclusion In my opinion, the valuation of Korn Ferry is now unappealing. Despite the strength of my Buy call in October 2023, I think KFY is a Hold now at best. In certain circumstances, it could even contract over the next 12 months in price. I believe it is wise during this time of the growing concern of multipolarity and weakening dollar sentiment to begin to look at global capital diversification in portfolios. I believe the West will continue to lead through technology, but on further research, the world looks like it is becoming more multipolar, and as a result of this, I see it likely that major financial institutions will become more globally diversified, presenting a more entrenched form of globalization than the hard-unipolar model we have seen previously. There are several Indian professional services firms that I have my eye on as a result, which I will endeavor to analyze for readers in future analyses if they are also U.S. listed.

Buy cryptocurrency

Source link

Refer And Earn Demat Account – Get ₹300 | Referral Program

Open Demat Account In Angel One For FREE