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Korn/Ferry International – Attractively Valued

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Korn Ferry International (KFY) shares pulled back ~$19 in early September when the company took a sizable Goodwill writedown as part of its strategic reorganization. This resulted in KFY shares becoming fairly valued.

KFY has now just reported the best quarterly top line and bottom line results in the company's history.

Shares have pulled back slightly subsequent to early September but I attribute this pullback to current market conditions.

I view shares as attractively valued but caution dividend yield hungry investors that this is not the type of company that will hold any appeal.

 

Summary

  • Korn/Ferry released Q2 results and reported the best top line and bottom line results in the company’s history.
  • Many investors will likely shy away from a KFY investment because of its sub 1% dividend yield and stagnant quarterly dividend.
  • I view shares as being attractively valued and am currently employing a conservative covered Call option strategy to lower my cost base and to generate additional positive cash flow while I wait for KFY shares to appreciate in value.

Introduction

In September, subsequent to Korn/Ferry International (NYSE: KFY) releasing its Q1 2019 results and the stock price plunging from the high ~$60s to the high ~$40s, I decided to initiate a position.

In this article I wrote that KFY had just reported a diluted loss of $0.70/share versus diluted EPS of $0.51/share in Q1 FY2018 and adjusted diluted EPS of $0.78 in Q1 FY2019 versus adjusted diluted EPS of $0.55 in Q1 FY2018. I indicated:

‘The reason for this loss under GAAP is that on June 12, 2018 KFY’s Board of Directors approved a plan to go to market under a single, master brand architecture and to simplify the Company’s organizational structure by eliminating and/or consolidating certain legal entities and implementing a rebranding of the Company to offer the Company’s current products and services using the “Korn Ferry” name, branding and trademarks. In connection with that Plan, KFY indicated that the intent was to sunset all sub-brands (ie. Futurestep, Hay Group and Lominger).

The purpose of harmonizing under one brand was to help accelerate the firm’s positioning as the preeminent organizational consultancy and to bring more client awareness to its broad range of talent management solutions.

KFY indicated the rebranding would have no impact on the financial reporting for its various segments with the change in reporting to commence Q1 FY2019.’

Fast forward to December 6th and KFY has just released Q2 results in which it has just reported the best top line and bottom line results in the company’s history.

Despite strong results, Mr. Market has not been kind to KFY’s stock price and it has dropped to the current $44.51 level as I compose this article. I am not concerned about this further pullback and as indicated in this article, stock pullbacks should be looked upon from a positive perspective.

I strongly suspect anybody reading this article likes to acquire something when it is on sale. It is surprising, however, how the very same people who like to get a ‘deal’ get upset when the share price of a company in which they have invested drops in value. If a share price decline is not attributed to a permanent impairment of the company I don’t see the need to be concerned. In fact, acquiring more shares at a more favorable price (unless you hold a full position) is what comes to my mind.

In hindsight, when I initiated my KFY position in September 2018 and wrote covered calls, I didn’t wait long enough for the option values to fully catch up with the drop in the share price. I also went too far out on the calendar when I wrote my calls.

When I wrote calls with a March 15, 2019 expiry and a $55 strike price, shares were trading just below $50 and I only received $1.35/share. If my memory serves me correctly, a little patience on my part in writing these covered calls and I could have received closer to $2.50 - $3/share.

While the last price for these options is reflected as being $1.88/share, the Bid and Ask prices are $0.45 and $0.75 respectively as I compose this article. This means that if I were to buy my covered calls to close my position I would need to pay somewhere in this range.

I have no pressing reason to close out my position. Quite frankly, with the way Mr. Market is behaving I strongly suspect KFY’s share price will not come close to the $55 strike price by the March 15th expiry. If the share price stays below $55 then the options will just expire worthless and I will retain my shares and the option premium.

With KFY trading at $44.51 and 6 month results having just been reported, let’s look at whether KFY is currently an attractive investment.

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I hope you enjoyed this post and I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to charles@financialfreedomisajourney.com.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long KFY.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.

By |December 7th, 2018|General Investing|Comments Off on Korn/Ferry International – Attractively Valued

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