CRA Upgraded to Outperform

We are upgrading our rating on CRA International Inc. (CRAI), a leading global consulting firm, to Outperform from Neutral.

The rating was raised on the back of strong first quarter 2011 results, which surpassed the Zacks Consensus Estimate. The blockbuster results were aided by an active pipeline for both litigation and management consulting businesses, upside in utilization rate aided by successful restructuring actions and cost-containment initiatives, which led to a double-digit growth in operating margin for the first time in two years.

Despite clients’ cautious aggregate spending, business conditions have started to improve with a healthy new business lead flow, improved conversion rate and higher demand for services. We believe the company’s growth initiatives, healthy cash balance, new business wins, and international expansion will help generate positive results going forward.

Moreover, CRA International views employees and clients as the two pillars of the company, which can drive growth. CRA International continues to invest in business developments and client-facing activities including recruiting senior-level consultants. The company has eventually started to benefit through these investments, as within litigation consulting, the business development team that was assembled in late 2010 continue to enhance their lead flow by establishing and extending relationships with law firms.

First Quarter Results

CRA International reported first quarter 2011 pro forma earnings of 40 cents per share, comprehensively beating the Zacks Consensus Estimate of 21 cents and the year-ago quarter earnings of 4 cents per share.

Total revenue grew 33.2% on a year-over-year basis to $77.0 million and handily beat the Zacks Consensus Estimate of $71.0 million. The upside in revenue was driven by higher demand across all services.

During the reported quarter, CRA International’s utilization rate expanded 200 basis points (bps) sequentially to 75%, reflecting signs of a recovery in consumer spending. This marks the highest utilization rate achieved by the Boston, Massachusetts-based company in more than three years.

CRA International witnessed a year-over-year increase of 290 bps in gross margin to 33.5% and a 680-bp surge in operating margin to 10.0%, based on the company’s efficient restructuring activities.

Earnings Estimate Revisions: Overview

Following the first quarter earnings release, the Zacks Consensus Estimate for the company has been on the rise, with the analysts remaining bullish on the stock. The strong first quarter results bolstered the analysts’ confidence. The earnings estimate details are discussed below.

Agreement of Estimate Revisions

A positive inclination can be witnessed among the analysts, who mostly remain bullish on CRAI. Revision trends in the last 30 days drifted toward the positive side. For fiscal 2011 and 2012, all the analysts covering the stock raised their estimates. None of the analysts have reduced their estimates.

The analysts have increased their estimates based on strong first quarter results and a higher demand for services, an improving utilization rate, and margin expansions will result in strong earnings growth. However, there has been no revision in the analysts’ estimates over the last 7 days.

Magnitude of Estimate Revisions

Earnings estimates rose 20 cents to $1.48 for fiscal 2011 and were up 24 cents to $1.72 for 2012.

CRA INTL INC (CRAI): Free Stock Analysis Report

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