We are upgrading our rating on CRA International Inc. (CRAI), formerly Charles River Associates, to Neutral from Underperform. The company provides legal, regulatory, business consulting and other expert services through its specialized consultants across the globe.
The rating was upgraded on the back of third quarter 2010 earnings results, which were in line with the Zacks Consensus Estimate. This was mainly due to margin improvement and pickup in larger projects and engagements, particularly on the management consultant side of the business, partially offset by a decline in demand witnessed in litigation businesses.
CRA International derives its revenues primarily based on its utilization rate (the amount of time billed in relation to the amount of time worked). During the reported quarter, the utilization rate shot up 800 basis points from first quarter and 300 basis points from second quarter of 2010 to 68% showing signs of recovery in consumer spending, although less than management’s target level of low 70’s.
Based on efficient restructuring activities, gross margin improved 120 basis points (bps) year over year, and operating margin expanded 80 bps. We expect a sustained improvement in utilization and successful restructuring activities to be the key catalysts for the company’s growth.
Moreover, business conditions have started to get better with healthy new business lead flow, improved conversion rate and active pipeline of both litigation and management consulting businesses. Going forward, we believe the company’s growth initiatives, improving international operations, new business wins and solid cash balance will help to generate positive results in the long term.
However, we remain cautious on the stock as positive impacts will likely be marred by clients hesitant to spend aggressively on major consulting projects, given the current market volatility. The company’s growth can also be hindered by a continuous decline in organic revenues. We prefer to remain on the sidelines as overall visibility remains hazy.