Tuesday, December 10, 2019

A Current AIM Small Cap Equity Holding: The Hackett Group (HCKT, $15.26): “The Hackett Droop”

The Hackett Group (HCKT, $15.26): “The Hackett Droop”
By: Shant Poladian, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

The Hackett Group, Inc. (NASDAQ: HCKT) is an intellectual property-based consultancy providing services in business strategy, finance, human capital management, strategic sourcing, procurement, and information technology. Moreover, HKCT provides performance measurement services including, benchmarking, enterprise performance management, and executive advisory in the United States and internationally.  

• Net revenue declined for the fourth consecutive quarter, at -2% year-over-year.  

• International revenue declined 31% year-over-year, as Brexit uncertainty in European markets is expected to continue.  

• Cloud implementation revenue grew 30% year-over-year, offset by the decline in on-premise related implementations.  

• Strategic investments in fully digitizing all of the intellectual property services, development of next generation benchmarking platform, and the introduction of Hackett Digital Transformation Platform drive competitive advantages.

Key points: 

On November 5, 2019, The Hackett Group released third quarter results. HCKT reported net revenues of $72.7 million and earnings per share of $0.27, both of which were within management guidance. However, according to the analyst consensus, HCKT was expected to generate net revenues of $73.2 million and $0.28 earnings per share. Ted Fernandez, CFO of HCKT, claimed unfavorable international revenues impacted earnings per share by $0.03 when compared to guidance.

U.S. revenue grew 4.2% year-over-year, led by 5.5% growth for the Strategy and Business Transformation segment year-over-year, and 3.2% growth for the EEA Solutions Group year-over-year. This was driven by strong growth from SAP and Oracle ERP practices, as well as strong cloud revenue growth from EPM practices. Cloud implementation revenue has grown 30% year-over-year, offsetting Oracle EPM on-premise declines. Management expects U.S. revenue growth rate to accelerate into the fourth quarter, by projecting year-on-year U.S. fourth quarter growth to be above 6%.

Total company international revenues for HCKT’s International Group were $8.4 million in the third quarter of 2019, accounting for 13% of total company revenues. This represents a decrease of 31.1% on a year-over-year basis. This decrease was higher than expected, as uncertainty surrounding Brexit continues to impact client decision making. Furthermore, management expects international revenues to decline 25% in the fourth quarter of 2019. As a result of continued weakness in HCKT’s international operations, HCKT will incur approximately $2.5 million in restructuring charges in the fourth quarter of 2019.  

HCKT’s balance sheet is strong, and continues to generate strong profitability and cash flow from operation. This allows HCKT the ability to fund acquisitions while continuing to invest in the business. HCKT continues to increase acquisition deal size, and expects a 12 to 24-month integration timeline. In May of 2017, HCKT made their most aggressive deal in acquiring Jibe Consulting. This acquisition has led to the growth in total Oracle Cloud revenue growth.

What has the stock done lately?

On November 5, 2019, HCKT closed at $17.60 per share, and incurred a 13.3% loss the following day, closing at $15.26 per share. Following HCKT third quarter earnings results, the stock price has remained between $15.26-$15.38. At HCKT’s most recent meeting, the board of directors declared the next semi-annual dividend of $0.18 per share, which will be paid in January 2020.  

Past Year Performance: 

Over the past year, HCKT reached a 52-week high at $19.57, and a 52-week low at $14.54. Over the past year, HCKT is down $1.98, or 11.29%. YTD HCKT is down $0.55, or 3.42%.

Source: FactSet

My Takeaway

Uncertainty in European markets, due to Brexit, is disappointing, but I believe management’s guidance for international revenue is clearly identified and priced-in. I am optimistic that Hackett will continue to recognize revenue growth in the U.S., as demand declines for on-premise implementation, and demand for cloud implementation grows. Moreover, investments in fully digitizing all of the intellectual property services, development of next generation benchmarking platform, and the introduction of Hackett Digital Transformation Platform will enable HCKT to position itself ahead of competitors. With these reasons, I believe HCKT represents a hold.

Source: FactSet