Earnings Scorecard: CRA International

A leading global consulting firm CRA International, Inc. (CRAI) reported its earnings of 30 cents for the third quarter of 2010 on September 30, 2010, in line with the Zacks Consensus Estimate and up by 1 cent from the year-ago quarter. The reported quarter’s earnings benefited from margin improvement but litigation business remained sluggish.

Overall, the analysts’ opinion remains negative on the stock, as the overall visibility remains misty.

Third Quarter Review

During the third quarter, CRA International’s total revenue, excluding NeuCo’s revenues, fell 4.5% year over year to $82.4 million due to a decline in demand for the litigation business.

During the reported quarter, the utilization rate shot up 300 basis points sequentially to 68%, showing signs of a recovery in consumer spending, although less than management’s target level of low 70’s.

CRA International saw year-over-year improvements of 120 basis points (bps) in gross margin to 34.1% and 80 bps in operating margin to 8.0%, based on its efficient restructuring activities.

(Read our full coverage on this earnings report: CRA International Mixed 3Q Results)

Earnings Estimate Revisions: Overview

Estimates have moved down for CRA International since the earnings release, with analysts being skeptical about the long-term performance of the company. The earnings estimate details are discussed below.

Agreement of Estimate Revisions

For the fourth quarter of 2010, 2 of 3 analysts covering the stock reduced their expectations, while only 1 moved in the opposite direction during the last 30 days. For both fiscal 2010 and 2011, 2 out of 3 analysts have slashed their estimates. None of the analysts has raised the expectations. Thus, revision trends in the last 30 days drifted toward the downward side. Negative revisions by analysts are based on the apprehension that an uncertain economic environment will continue to impact clients spending.

However, one analyst has raised the estimate for the fourth quarter of 2010, based on an increase in revenues, driven by a higher utilization rate.

Magnitude of Estimate Revisions

In the last 30 days, the Zacks Consensus Estimate spiked up by 3 cents, 4 cents and 5 cents to 31 cents, 83 cents and $1.24 for the fourth quarter of 2010, fiscal year 2010 and 2011, respectively. The magnitude of estimate revisions indicates that analysts are skeptical regarding the fundamentals of CRA International and its growth prospects.

Our Recommendation

CRA International’s third quarter earnings were in line with the Zacks Consensus Estimate, primarily owing to margin improvement, pickup in management consultant side of the business, higher utilization rate and a recovery in its international operations. However, demand in litigation businesses remained sluggish.

We remain cautious on the stock, as CRA International expects to face a relatively challenging environment in the coming quarter, owing to clients’ improved, but cautious aggregate spending. Thus, hesitation of clients to spend aggressively on major consulting projects and a decline in organic revenues are expected to limit the company’s growth. Overall, near-term visibility remains unclear, given the current volatile market trends. Absence of definite management guidance also indicates the lack of a long-term visibility on the stock.

Accordingly, we have a Zacks Rank #4 (short-term Sell recommendation) on the shares. Our long-term recommendation for the stock also remains Underperform.

Apart from CRA International, another stock that promises long-term growth opportunities is Towers Watson & Co. (TW), which currently has a Zacks Rank #1 (short-term Strong Buy recommendation).

CRA INTL INC (CRAI): Free Stock Analysis Report

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