Navigant Downgraded By William Blair On Lack Of 2019 Visibility

While Navigant Consulting, Inc. NCI recently exhibited a surge in profit and beat both revenue and earnings per share estimates in the second quarter, the stock faces uncertainty in 2019, according to William Blair. 

The Analysts

William Blair analyst Timothy McHugh downgraded Navigant from Outperform to Market Perform.

The Thesis

Navigant's Q2 was better than anticipated at face value, but most of the upside was derived from its disputes and investigations segment — which is being sold — as well as energy and financial services, McHugh said in the downgrade note. (See the analyst's track record here.) 

“Revenue for the health care segment (which accounts for almost 60 percent of revenue from continuing operations) was up modestly sequentially, but was down 8 percent year-over-year.”

Navigant expects EPS to grow by 120 percent next year and its adjusted EBITDA margin to improve to roughly 12 percent, according to William Blair. 

If the company is able to scale health care revenue to $50-75 million in 2019, the guidance implies 3-7-percent growth for the rest of the company, McHugh said. Continuing operations revenue grew by 2 percent organically in the quarter, and the health care segment is expected to improve, the analyst said. 

Navigant will have an opportunity for strong capital deployment, McHugh said.

“We are optimistic that Navigant will deliver solid earnings growth during the next few years, but we see some risk to the ramp up in earnings projected for 2019, the timing and size of accretion from capital deployment and the valuation on those projections is already at the high end of what we expect for a consulting business." 

Price Action

Navigant shares were falling nearly 6 percent to $23.29 at the time of publication Friday.