Korn Ferry (KFY, Financial) – Korn Ferry is a company that has historically been known for its market leading position in the executive search industry. This business entails highly sophisticated searches for senior roles at a wide variety of corporations and other organizations. Typical assignments might include the identification and recruitment of CEOs, CFOs or board members. This is a high margin and very lucrative practice for successful companies in this industry. However, Korn Ferry, mostly through a series of acquisitions over a number years, has expanded and diversified its lines of business to include other competencies, such as consulting roles to guide the planning of corporate workforces, the recruitment of large-scale, non C-suite workforces and a variety of educational and training consultations. Korn Ferry has also made strides building a digital business that is capable of monetizing Korn Ferry's proprietary data, which is one of the world's most substantial databases of employment and compensation information. The company is run by one of the industry's most respected CEOs, who has been responsible for the company's acquisition and diversification strategy and is also substantially aligned with shareholders via a large personal interest in the stock.
Korn Ferry's issues today appear entirely exogenous to the company and are primarily a function of the COVID-related shutdown. Not surprisingly this has caused a reduction in new business generation for the company, which we believe to be temporary. We view the company to be quite cheap as measured by its valuation relative to any estimate of normalized profit. Furthermore, the combination of a very strong balance sheet and a highly flexible cost structure put the company in a position to endure long bouts of depressed operating conditions, if necessary. We do suspect though that there are several underappreciated factors that may drive a more rapid business recovery than some seem to expect. First, it would not be surprising to see an acceleration of C-suite and board member turnover as companies emerge from the pandemic and adjust previous plans. Similarly, the COVID experience has accelerated a number of pre-existing trends whereby a variety of large-employment industries may not be in a position to re-hire their former workforces for some time while other large-employment industries are finding themselves needing to expand workforces rapidly. Last but not least, Korn Ferry is one of the companies on the front lines of helping companies accomplish their diversity and inclusion goals. Korn Ferry's employee education and training functions support corporate culture as it relates to diversity and inclusion and the company's executive search functions are increasingly being called upon to help make boards and c-suites more diverse. It is our sense that this incremental source of demand is lasting and more substantial than may be appreciated today.
From Third Avenue Value Fund (Trades, Portfolio)'s third-quarter 2020 portfolio manager commentary.
