Korn Ferry (KFY, Financial) is a leader in human resources consulting that employs an acquisition strategy to fuel profitable growth.
In fact, to start 2023, the company successfully expanded its business by acquiring Salo, a prominent Minnesota-based recruiting company specializing in interim talent in the fields of finance, accounting and HR. This comes on the back of last year's purchase of Infinity Consulting Systems, or ICS) renowned for its flexible workforce solutions targeting interim professional positions, as well as Patina Solutions Group, known for its executive search services.
With a market capitalization of just $2.60 billion and annual revenue rapidly approaching $3 billion at 9% net profit margins, there is an opportunity for long-term capital gains with a high degree of safety.
What is Korn Ferry?
Besides being the namesake sponsor of the developmental tour for the PGA Tour, Korn Ferry is a global consulting firm that provides services and solutions related to organizational strategy, search and recruitment, talent management, leadership development and rewards and benefits.
The Los Angeles-based company was founded in 1969 by Lester Korn and Richard Ferry and, over time, has expanded to offer a range of services to include leadership development, succession planning, talent acquisition, and employee engagement, among others.
The company works with clients across many sectors, namely technology, health care, financial services, industrial and consumer. Its services are aimed at helping organizations to attract, develop and retain their talent, a critical aspect for any business even in the time of artificial intelligence uprising.
In addition to its consulting services, Korn Ferry produces a significant amount of research and thought leadership in the areas of human resources, organizational effectiveness and leadership. This is how most consulting firms do it, allowing content to produce long-term value adds and attention while also used as a selling framework.
The company has gone through several acquisitions to expand its services, including the purchases of leadership development companies Lominger and PDI Ninth House and talent analytics company Global Novations. In 2015, it acquired the Hay Group, a leading management consulting company, significantly expanding its consulting capabilities, especially in strategic human resources and talent management.
Extremely durable business segment (for now)
Korn Ferry's business model, focused on talent and organizational consulting, has shown extreme durability thanks to a constant need for talent across the organization. I believe this to be true despite the fears that artificial intelligence will render jobs obsolete.
Business is still about people and the need to recruit, manage and retain talent, so demand for these services should remain consistent. As businesses continue to evolve, new roles are being created and organizations will adapt to changing industry dynamics, all of which require effective talent management strategies.
Trends such as increased remote work, diversity, equity and inclusion initiatives, digitization and the changing nature of work are creating new challenges and opportunities in talent management. This should keep demand high for Korn Ferry's services. As long as businesses exist, there will be a need for leadership development, succession planning and executive search services.
More importantly, Korn Ferry's global footprint contributes to its durability. The company serves multinational clients and draw from a diverse talent pool, insulating it from regional economic downturns. The company’s diverse offerings also contribute to its durability which cover the entire employee lifecycle, from hiring to retirement. As long as there are employees, Korn Ferry should continue to grow and prosper.
A history of financial strength and performance
Taken as a snapshot in time, investors could look at Korn Ferry, see that cash flow from operations is down around 30% this year and think the market capitalization is justified. However, long term, the company has produced exceptional growth across every key aspect of its business. These are the moments value investors look for.
In the last 12 months, the company has seen record revenue of $2.85 billion, along with net income of $248 million. Revenue is up 61% from $1.76 billion in 2018 and up 250% from $812 million in 2013. Net income has seen even more improvement with an 88% gain since 2018 and 651% gain since 2013. Korn Ferry has also increased retained earnings from $236 million to nearly $1.3 billion, leading to $1.60 growth in market capitalization for every dollar retained. And, that is even after the 40% drop from its November 2021 highs.
Around 31% of KornFerry's fee revenue is generated through Executive Search. Consulting Operations contribute to 24% of the revenue, with a significant focus on industrial consulting. Digital solutions make up 13% of the revenue stream. Professional Search and Interim roles account for 17%, while Recruitment Process Outsourcing represents 15% of the revenue. Each of these segments are likely to continue to grow, even as the world shifts further toward AI.
Bottom line
Korn Ferry is set to release its fiscal fourth-quarter earnings later this month with the earnings per share expected to be between 97 cents and $1.05. Going back to 2018, the company has only missed expectations three times. While earnings in 2023 and 2024 may be lower, long term the company will remain profitable and continue to grow shareholder value through share buybacks and retained earnings. This will eventually show up in higher market values.
