Cost-Cutting Consulting: Under the Radar

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BOSTON (TheStreet) -- Worker productivity advanced 9.5% in the third quarter, prompting speculation that a hiring rebound is imminent. Yet, many companies are running smoothly with fewer workers. Although the recession decimated payrolls, it also catalyzed efficiency. As deleveraging continues, companies will attempt to widen profit margins as revenue grows modestly.

Consultants able to lower internal costs will benefit from this trend. Lincolnshire, Illinois-based Hewitt Associates(HEW) provides human-resources services. Its fiscal fourth-quarter profit more than doubled to $64 million, or 68 cents a share, as revenue dropped 6% to $774 million. Hewitt's operating margin widened from 10% to 15%.

Hewitt's earnings were bolstered by cost-cutting. Revenue derived from benefits outsourcing was flat compared with a year earlier, but profit rose 31% to $87 million. Sales from human-resources outsourcing declined 16% to $114 million, but its loss narrowed to $2.1 million. Even though revenue is weak, Hewitt expects strong 2010 growth in its consulting segment, which suffered a 10% quarterly revenue drop.

Over the past three years, Hewitt Associates has increased revenue 2% annually, on average, as profit surged 62% a year. Earnings growth has helped Hewitt's stock soar 55% so far this year, more than major U.S. indices. Despite the impressive run, Hewitt is still cheap. The shares sell at a discount to outsourced-service peers on earnings, projected earnings, book value, sales and cash flow.

Hewitt has a stable financial position, with $643 million of cash and $655 million of debt. Since the year-earlier quarter, its cash balance has grown 19% as the debt load lessened 18%. We give Hewitt Associates a financial-strength score of 6.9 out 10, below the "buy"-list average, due to a quarterly net loss in 2007. But Hewitt receives growth and performance scores higher than the "buy"-list averages.