Cabot Small-Cap Confidential Issue: December 1, 2022

The Big Idea

The most consistent challenge organizations face over the years is managing change. That’s been especially true through the pandemic. But the reality is things are always changing, just at varying paces and intensities.

Another reality is that a lot of companies don’t have the manpower and expertise to effectively manage change. They have enough challenges with the day to day, just finding and retaining the right people to focus on their core competencies.

Employing thought leaders, transformation specialists and strategists is often a luxury they can’t afford.

This is why consultants are always in demand. Professional services firms have the resources, and autonomy, to help organizations think about and address big-picture challenges. Like how to adapt their business models, lower risks, slash costs and allocate internal resources more effectively.

Today’s new portfolio addition is a small-cap company focused on helping clients in rapidly changing markets navigate constant disruption and pursue growth opportunities even while managing through technological change and evolving consumer preferences.

It’s not the sexiest stock out there. But it’s a great business. And it’s growing revenue and earnings at double-digit rates. And plans to return up to 50% of cash flow to shareholders.

The Company

Huron Consulting (HURN) is a professional services company focused on helping clients develop sound business models, streamline operations, embrace digital transformation and navigate constant change.

The company was founded in 2002 and came public in 2004. It is based in Chicago, Illinois and has additional locations in the U.S., Canada, India, Singapore and Switzerland.

Huron has a market cap of $1.5 billion and is on pace to grow revenue by nearly 20% to $1.1 billion this year. EPS should be up 27% to $3.31. Management plans to return 25% to 50% of free cash flow to shareholders.

As with other successful consulting firms, technology, data, analytics and people are the heart of Huron’s business. The company can’t succeed if it hasn’t hired and developed industry-specific talent required to help other organizations achieve their goals. The company ended Q3 with 4,571 revenue-generating professionals, up 23% over a year ago.

Its biggest market segments are Healthcare and Education, which represented 42% and 26% of 2021 revenue, respectively. The remaining 32% of revenue came from what Huron now calls its Commercial segment, which includes energy and utilities, financial services, industrials and manufacturing, and public sector markets.

Examples of clients include health systems, academic medical centers, hospitals, colleges, universities, research institutions, banks, asset managers, insurance and private equity firms, oil and gas and utility companies, manufacturing companies and the federal government.

Huron serves nearly 2,000 clients around the world. Its ten largest clients accounted for just under 20% of 2021 revenue.

The company has recently begun to focus more on its strength: providing digital services such as helping customers transition to cloud-based tech and analytic solutions. In fact, it has begun reporting revenue specifically related to Digital, and has been building out partnerships in the area.

It is now a partner with many of the major enterprise software companies, including Oracle (ORCL), Salesforce.com (CRM), Workday (WDAY), Amazon Web Services (AMZN), Informatica (INFA) and SAP (SAP), among others.

Products & Services

Beginning in 2022, Huron began reporting revenue across the three segments that best represent how it views its market opportunities - Healthcare, Education and Commercial.

Let’s dig into each of these.

Healthcare

Huron’s Healthcare segment serves hospitals, health systems, academic medical centers, medical groups and health plans. Most of these organizations focus on changing the way care is delivered, evolving to a sustainable business model, tweaking reimbursement models and other financial strategies, optimizing their cost structures, developing digital capabilities and exceeding the expectations of patients and employees. Huron’s professionals have the deep industry experience to help them on all fronts.

Education

This segment serves public and private colleges and universities, academic medical centers, research institutions and not-for-profits (NOPs). These organizations are challenged with demographic and enrollment challenges, competition and remaining focused on their strategic missions while strengthening their research and operational business models. Huron helps in areas like strategy, business operations, digital transformation and technology solutions, student lifecycle, research strategies and student experience.

Commercial

Huron’s Commercial segment works with C-suite executives and business unit and functional leadership teams in companies from the energy and utilities, financial services, industrials and manufacturing, public sector and other industries. Huron’s consultants help develop and implement financial and operating models that can help these organizations achieve and/or maintain sustainable competitive advantages. Think along the lines of implementing technologies like automation, embedded analytics, product development and launching and managing through distressed situations.

Growth Initiatives

Accelerated Growth & Profit Strategy: In March 2022 Huron unveiled a strategy to increase shareholder value through growth across its three segments and through margin expansion. While there is a lot to it, the high level is the company sees huge potential to provide digital offerings that support clients across its segments. It also sees potential to boost EPS and cash flow, which it will deploy, in part, through shareholder-friendly share buybacks and acquisitions. Over the first nine months of 2022, Huron has repurchased 7.8% of its common stock. Expect to hear more on this as we move into 2023.

Operating Model Reorganization: At the beginning of 2022, Huron changed its go-to-market strategy to better integrate its industry talent with digital, strategic and financial advisory capabilities. While this sounds like a lot of “consultant speak” it actually goes a lot deeper than that. It meant aligning the business around the three segments (Healthcare, Education, Commercial) and tracking revenue and costs for each.

Focus on Digital: In 2021 Huron began reporting revenue across its two principal capabilities, (1) Consulting and Managed Services, and (2) Digital. Digital is a huge growth driver (+46% in Q3) as it represents Huron’s ability to help organizations invest in cloud-based tech and analytic solutions. These types of changes help an organization like this rally around what it does best, sell that to clients and, importantly, better communicate with investors.

New ERP System: In January 2021, Huron went live with a new ERP system that it had been working on since late 2019. This system is designed to improve how the company handles internal finance, HR, resources planning and admin functions, as well as to streamline the addition of functionalities in the future. It’s a subtle improvement that should drive margin improvement over time.

M&A & Divestments: Huron is an active acquirer of small consulting and technology firms that help round out the business and/or add capabilities at a lower cost than internal development. Acquisitions in 2021 include Unico (data strategy and tech consulting), Bad Rabbit (research administration software services team), Whiteboard (student enrollment advisory firm), and Perception Health (healthcare predictive analytics). Expect more of the same in future quarters. The company has also trimmed areas, such as its Life Sciences business, that aren’t strategic.

The Business Model

Huron generates revenue by providing consulting and other professional services (software support, maintenance services, healthcare managed services, coaching services, etc.) as well as software licenses to organizations in a wide variety of industries. Revenue is broken down into two categories, (1) Digital and (2) Consulting and Managed Services.

Revenue is based on billable hours, services provided and/or outcomes achieved. It has over 4,600 full-time client service and support pros, including around 170 client-facing managing directors. It also employs temporary employees on an as-needed basis. Managing directors are crucial at bringing in new business through referrals, as well as repeat business. Big picture, the more people Huron has, the more hours they put in, the more value they deliver and the more the company is able to charge, both by the hour and through fixed-fee contracts, the more money it will make.

The Bottom Line

In 2021 revenue grew just 6% to $927 million. This came after a 10% decline in revenue in 2020. The pandemic was not good to Huron. However, things have picked up significantly as the global economy has opened up. Over the last four quarters, revenue has grown 30%, 29%, 20% and 28%, respectively. EPS over the same four quarters has ranged from 20% (Q2) to 78% (Q1) and has beaten expectations every quarter.

In Q3, reported in early November, revenue rose 28% to $292.2 million. EPS rose 29% to $1.01. The company enjoyed strong demand for Digital capability services (+45.5%) as clients continue to invest in the cloud and in analytics. Consulting and Managed Services revenue was up 15.5%.

Huron is on track to deliver full-year revenue growth of 19% to $1.1 billion and EPS growth of 27% to $3.31. Looking into 2023, the current consensus is for revenue to grow 10% to $1.21 billion and EPS to grow 20% to $3.98.

As part of its accelerated growth and profitability strategy, Huron management expects to deliver, through 2025, low double-digit annual revenue growth, high-teen annual EPS growth, and to deploy 25% to 50% of cash flow to shareholders. This should be good for the stock. Over the first nine months of 2022, Huron has repurchased 7.8% of its common stock.

Risk

CEO Transition: Huron’s 13-year CEO and co-founder, James Roth, will step down into a full-time, client-facing vice chairman role at the end of 2022. His successor, Mark Hussey, current President and COO, will become CEO. While there is always risk in a leadership transition Mr. Hussey has been with Huron for a decade in various roles (CFO, Treasurer, CMO and more) and appears more than capable.

Consulting Demand: If the economy tanks in 2023 clients may delay new projects.

Excitement Around Digital: Digital services was up 46% in Q3 and is clearly driving excitement among investors. While digital transformation isn’t going anywhere, there could easily be shifts in demand as organizations prioritize some projects over others. Huron may become sensitive to trends in its fastest-growing area.

Share Buybacks: Investors are expecting share buybacks. If management can’t deliver, the stock could suffer.

Competition

There are a ton of consulting companies out there, both big and small. While all are “competitors,” Huron faces a different competitor mix depending on what industry and what expertise area it’s working in.

The Stock

Trading Volume: HURN trades an average of 116,000 shares daily, around $9 million. We shouldn’t move the stock.

Historical Price: HURN has been through numerous business cycles since it came public in 2004. Shares spent much of 2021 and early 2022 trading in the 42 to 55 range but then began to move higher as spring arrived. HURN jumped above its 200-day line on April 5 (near 48) and has mostly made a series of higher highs and higher lows above its 50-day line since then. At around 78, the stock is right near its 2015 high, while the 2007 high of 84 is the next hurdle. I believe it can break out to all-time highs for the reasons in this report, which would be a powerful endorsement of the stock’s potential.

Valuation: HURN trades with a trailing PE of 17.8, close to the low end of its range dating back almost a decade.

Buy Range: Expect to buy between 75 and 80 prior to the FOMC meeting in mid-December.

The Next Event: Q4 earnings likely in late-February 2023.

Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for January 5, 2023.