Korn Ferry: An Undervalued Play on the State of the Workforce

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Korn Ferry (NYSE: KFY) reported its fourth quarter and full-year 2023 earnings on June 27. KFY stock is down over 4% in early trading on weak guidance for the coming quarter. But that's likely to be short-term noise. For investors wanting to take a longer-term view, the report looks at the evolving state of the global workforce in 2023 and likely beyond.  

In its investor presentation released with the earnings results, Korn Ferry reported decelerating demand for permanent placement solutions (e.g., executive search and recruitment process outsourcing – RPO). But increased revenue from its professional search and interim services business unit offset that weakness. It's a relatively new revenue stream for Korn Ferry, but it's coming at an ideal time.  

The demand for interim workers continues a trend that began in 2022. The prevalence (and in some cases, the preference for) remote work, a growing gig economy and employers' desire for a more diverse and expansive pool of candidates are just some reasons for this trend.  

Companies must become more sophisticated at finding the right candidates to fill these positions. For example, remote work can come with its own set of challenges. Companies need to hire candidates who have successfully worked remotely. As a recognized leader, Korn Ferry is well-positioned in a tight labor market.  

You get a little artificial intelligence (AI) exposure as well. Part of the secret sauce behind what Korn Ferry offers to its clients is what they call the Intelligence Cloud, the company's proprietary AI-based platform powered by over five billion data points. And as the company remarked in the press release for its earnings results, it will continue to invest in generative AI to enhance the power of the Intelligence Cloud. 

What Did the Earnings Report Say? 

The organizational consulting and recruitment firm delivered earnings per share (EPS) of $1.01 for the quarter, a tick higher than the $1 in EPS analysts expected. 

On the revenue front, the company generated $730.90 million, more than the $699.83 million analysts were forecasting.

The revenue number was slightly higher than the $721.14 million the company reported in the same quarter in 2022. But earnings were down about 42% on a year-over-year basis. As always, you have to look at a company's forward guidance, moving KFY stock lower in early trading.  

Korn Ferry guided revenue from $668 million to $698 million. At the high end of that range, the company would beat expectations for the $695.9 million it delivered in the same quarter in 2022. The guidance's midpoint would align with analysts' expectations for $682.7 million.  

As important as guidance is, context is equally important. In this case, it's important to note that Korn Ferry is reporting that it may report lower guidance in a quarter that is typically its weakest quarter. It would be more concerning if the company forecasted softer earnings in its strongest quarter.  

Is it an Opportunity to Buy KFY Stock? 

A company's stock price tends to follow in the direction of its earnings. For Korn Ferry, lower guidance on top of what was already expected to be a year-over-year decline in earnings, should signal that KFY stock may drift lower.  

However, when you dig into the fundamentals you see that — at least at a glance — an opportunity exists with KFY stock.  

It's trading at a forward P/E ratio of just over 10x earnings. And despite beating on revenue estimates in seven of its last eight quarters (and it beat on earnings in six of those quarters with another quarter where it met expectations), KFY stock is down 14.5% in the last 12 months.  

The Korn Ferry analyst ratings on MarketBeat give KFY stock a "moderate buy" rating with a consensus price target of $62.67, a 27% improvement from the stock's current price. The company's earnings report also announced it was increasing its dividend to 18 cents per share from 15 cents per share.  

There may be better options for you in a sideways market today. Still, with an attractive valuation and a business model that will be a leading indicator of an economic recovery, KFY stock is one to keep an eye on.  

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