Earnings, Economy Help Korn/Ferry Get Ahead

Shares of executive-search giant Korn/Ferry International have more than tripled since the firm went public nearly a year ago, and the reasons aren’t, well, hard to find.

The Los Angeles-based company has been generating earnings growth above expectations, and the economy remains strong, which means firms continue to need the chief executives and other senior managers that Korn/Ferry matches with employers.

Also, Korn/Ferry’s middle-management recruiting service on the Internet, called Futurestep.com, is growing quickly and has more than 500,000 job candidates registered at the site. That’s given Korn/Ferry’s stock a bit of the extra lift associated with so many other hot Internet-related stocks.

Optimism about the company’s prospects recently drove the stock as high as $36.69 on the New York Stock Exchange, more than three times the low of $11 the stock reached a year ago, just after its initial public offering.

The IPO was, in fact, a major dud: The company sold 11.75 million shares at $14 each on Feb. 10--only to see the price plunge immediately. The stock languished in the range of $11 to $15 until August, when it began to climb.

Now, even though the price is arguably getting a bit rich--it’s selling for a lofty 42 times the company’s estimated earnings per share for the fiscal year that will end April 30--the handful of analysts that follow Korn/Ferry continue to strongly recommend the shares.

“Korn/Ferry’s traditional business is performing very well in all regions, which isn’t surprising given the war for talent that’s going on,” said Kelly Flynn, an analyst at PaineWebber Inc. in New York.

But the company also “was the first and only company to get a solid footprint in the Internet-based [recruiting for] middle management, those jobs that pay between $75,000 and $150,000 a year,” she said.

Korn/Ferry’s Futurestep.com--launched in July 1998--is “not just a job board and it’s not trying to be, and most other Internet search platforms are just job boards,” Flynn said.

The gains were evident last month, when Korn/Ferry posted its best results ever for its fiscal second quarter ended Oct. 31--despite the fact that Futurestep.com continued to lose money because of ongoing start-up and expansion costs.

However, revenue at Futurestep.com--whose partners include America Online Inc. and Dow Jones & Co., publisher of the Wall Street Journal--jumped 59% from the prior quarter, to $6.3 million.

Even Korn/Ferry acknowledges that Futurestep.com will probably lose money at least through the current fiscal year.

Korn/Ferry said overall revenue in the quarter climbed 28% from a year earlier, to $116.3 million, and its operating profit--excluding one-time charges and gains--jumped to $11.5 million from $2.3 million a year earlier.

Korn/Ferry was started in 1969 by its current chairman, Richard Ferry, and Lester Korn, who retired in 1991. The company has 425 consultants in 71 offices in 40 countries.

The stock’s overall ascent is all the more gratifying for Korn/Ferry because the company had undergone considerable management turmoil shortly before the IPO--a big factor in the initially poor reception for the shares.

A year ago, Michael Boxberger resigned after only 19 months as chief executive and was replaced by Windle Priem, then chief operating officer and vice chairman of Korn/Ferry.

As the IPO approached, some analysts also fretted that the company and its stock could be buffeted by swings in the economy because a recession would almost certainly cause hiring freezes and cut down on management recruiting.

However, others noted that Korn/Ferry has some protection against the volatility because it’s a “retained” search firm, meaning it’s paid for its services regardless of whether it’s able to fill certain open positions with recruits.

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Late Bloomer

Shares of Korn/Ferry International slumped immediately after their initial public offering in February, but investors woke up to the company’s potential by late summer. Weekly closes and latest on the New York Stock Exchange:

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Source: Bridge News