Navigant s management continued to articulate the core aspects of its strategy, including shifting the business model toward a more recurring revenue stream, shifting its business mix toward higher group areas of opportunity, focusing on efficiently managing the cost structure and more carefully allocating capital (including targeting a 25% ROIC from acquisitions, although we calculate a total company ROIC of 6%- 8% during the last five years), and capitalizing on the significant changes affecting the energy and healthcare markets (which together account for about 44% of revenue). Management is optimistic that its strategy can deliver mid- to high-teens revenue growth during the next four to six years (versus a 2009-2014 estimated CAGR of 4%).
It is not rocket science to say that delivering substantially faster growth while also shifting the revenue mix toward recurring revenue streams and earning higher returns on capital from acquisitions would be positive for the stock over the next several years.
Navigant has made some progress on this strategy during the last few years (i.e., the revenue mix is gradually shifting toward higher growth areas, the company has built out its revenue cycle outsourcing business, and a significantly deleveraged balance sheet gives the company a lot of room for acquisitions), so there are some reasons to be optimistic about the company delivering faster growth.
However, there also is plenty of risk around the execution of this strategy it assumes a substantially faster growth rate and return on capital than the company has achieved in the past, and it is never easy for consulting companies to change their business model. Acquiring recurring revenue business models diminishes some aspects of the risk with acquisitions, but Navigant also will have to pay higher valuation multiples for these deals and competition in those sectors is high, so there is still plenty of risk related to the financial returns on these deals. In addition, the company s growth plans are reliant on sustained very strong growth in the energy and healthcare segments (to offset minimal growth in the other half of the business), as well as substantial growth from outsourcing, technology enabled, and new businesses.
Lastly, in the near term, the company s 2014 revenue and earnings projections are heavily back-end loaded (i.e., Navigant needs to see average quarterly revenue during the remainder of the year that is almost 15% higher than it saw in the first quarter and quarterly EPS [based on our model] has to ramp up from $0.20 in the first quarter to a touch more than $0.30 in the fourth quarter), which we believe leaves risk to near-term performance. Overall, we see appeal to management s long-term strategy and are optimistic about the growth potential of the healthcare and energy segments, but we remain concerned about near-term numbers and are not yet confident in projecting substantial improved growth and returns on capital for the company.