RealMoney Silver - KFY Is a Good Fit

KFY Is a Good Fit
By John Reese
RealMoney.com Contributor
1/31/2008 2:45 PM EST

Businesses need leaders and managers. It does not matter what industry they are in or how well the economy is performing, executive skills are required. Korn/Ferry International (KFY) makes a specialty of finding the right manager for the right position at the right company.

The company, founded in 1969, has conducted more than 100,000 senior-level searches. It has 80 offices in 39 countries, and its services, in addition to executive recruitment, include middle-management recruitment, corporate governance consulting, executive coaching, boards of director recruitment, leadership consulting and more.

Korn/Ferry has several things going for it. It has one of the best brand names in the business. It is global, an advantage when companies are increasingly operating globally.

Morningstar cites several trends in Korn/Ferry's favor: There is a shortage of management talent, employees and executives are increasingly mobile, and managers stay at companies for shorter periods (thereby requiring companies to engage in more executive searches). Says Morningstar, "According to IDC, roughly 19% of the entire U.S. workforce holding executive, managerial, and administrative positions will retire over the next five years. This workforce turnover, along with a shortage of talent, should make executive search firms like Korn/Ferry more essential to employers when looking to fill positions."

Korn/Ferry has attracted either "strong" or "some" interest from three of the strategies I use when picking stocks. Strong interest is the highest level of interest, and some interest is the next level, so having three strategies showing this much interest should encourage investors to give this company a good look.

One of the strategies that likes the company is based on the thinking of Ken Fisher. This strategy looks at the price-to-sales ratio as a way of measuring how much you are paying for sales and whether the stock's price is a good value. The P/S should be between 0.75 and 1.5, and Korn/Ferry falls nicely within this range, having a P/S of 0.96. The strategy is also conservative; it wants debt to be low -- Korn/Ferry clears this hurdle by having zero debt. The company also has a very strong inflation-adjusted EPS growth rate of 47.58%, more than three times the minimum set by the strategy. Plus, the company has positive free cash per share, and a three-year average net profit margin of 8.99%, well above the 5% minimum required.

The strategy I base on Peter Lynch's writings also likes Korn/Ferry. It uses the PEG ratio (P/E relative to growth), which for Korn/Ferry is a very strong 0.23 (1.0 is the maximum allowed). This is based on a P/E of 11.53, using the average of the three-and four-year historical EPS growth rates, and a growth rate of 49.9%. The company's lack of debt is, as with the Fisher strategy, an important plus for the Lynch strategy.

I also have a strategy based on Benjamin Graham's approach to investing, and it finds Korn/Ferry to its liking. The company is highly liquid, as seen with its current ratio of 2.34 (2.0 is the minimum allowed). And, like the previous two strategies, the Graham strategy is financially conservative and therefore prefers a low debt level. Korn/Ferry generates a lovefest with strategies that eschew debt, because it has no debt. This strategy also considers the P/E ratio. It uses the average earnings over the past three fiscal years, and wants the P/E to be 15 at most; Korn/Ferry's is 13.6. The last criterion of the Graham strategy multiplies the price-to-book ratio by the P/E and the result cannot be more than 22. Korn/Ferry just makes the grade with 21.9.

Executive search is a solid industry with strong prospects, and Korn/Ferry is one of the major players in this market. It is conservatively run financially, and the stock price seems reasonable. This is a good stock to have a well-diversified portfolio.