The Case for a ReboundIt's not as unlikely as you might think. The Economic Cycle Research Institute's Weekly Leading Index, which has
Epiq Profits From More and Bigger BankruptciesEpiq Systems primarily provides software and hardware to attorneys, trustees and companies that help them manage the myriad documents, assets and funds associated with a major bankruptcy. Its CasePower software, for instance, enables Chapter 11 bankruptcy trustees to manage debtor payments, creditor distributions and government reporting. Through an acquisition made in January, Epiq also provides the same sort of software and support to participants in class-action, mass tort and other complex legal proceedings. Over the 12 months ending March 31, the company earned $8.1 million on sales of $79 million. Unlike most ordinary software companies, however, in addition to site licenses, Epiq earns a monthly fee from financial institutions based on a percentage of total liquidated assets on deposit and on the number of trustees. It also gets monthly fees based on the number of cases that a client has in a database, as well as the number of claims in a case. So the bigger and more numerous the corporate bankruptcies, in other words, the more Epiq earns. The number of new bankruptcy filings each year varies based on the level of consumer and business debt, the overall economy and interest rate levels. Epiq management told investors in the company's latest 10-Q report that it believes the level of consumer and business debt is among the most important indicators of future bankruptcy filings. It then noted that the most recently available Federal Reserve Flow of Funds Accounts of the United States, published June 10, reported increases in both consumer and business debt outstanding as compared with the same period of the prior year -- the first increases after two quarters of decreases, as shown in the table below.
|U.S. Debt Growth by Sector |
Quarterly figures are seasonally adjusted annual rates
|Source: Federal Reserve|
FTI Consulting: Cheap (and Getting Cheaper?)Likewise, FTI Consulting also looks cheaper than it has in years, now that most believe bankruptcies are on the wane. This is another provider of services to the bankruptcy and legal industries, though FTI provides higher-value services such as forensic accounting, corporate refinance and restructuring, economic consulting and litigation support. Billing hours is the name of the game here, and in the last quarter they were higher. In its last report, the company reported $110.2 million in revenue and earnings per share of 27 cents -- 7 cents below estimates. The culprit was significantly higher expenses due to the sudden departure of numerous consultants. FTI has been rebuilding itself to become less reliant on bankruptcy and other complex financial consulting business. Its other lines are not as profitable, but they are more consistent from year to year. In the 12 months ending March 31, the company earned $51.5 million on $384 million in sales. If the company can retain more bankruptcy-related business than generally believed while at the same time improving its other lines, then the stock should be revalued upward. If not, then this already cheap stock -- P/E and price-to-sales multiples are near historic lows -- could get a lot more inexpensive. Insiders appear to be betting on a rebound, as they have bought 250,000 shares on the open market since November, at prices ranging from $16 to $19. (There was also one very large sale, of 5 million shares, by a major shareholder around $14 in early February.) FTI would not be an easy stock to buy, and may require a lot of patience, but the skepticism and negativity surrounding the company would probably reverse if the economy begins to visibly weaken in the coming months. The first target would be $18.65. If that is breached, then bulls will set their sights on $22. I'll watch both Epiq and FTI over the next six months and let you know how they are either weathering an economic recovery or exploiting a new downturn.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Epiq Systems to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.