Counter-cyclical compounder mispriced on a margin trough · +37.0% upside
Market sits below the entire MC band — P(below) = 0%Intrinsic value $218.86/share (no governance haircut) vs market $159.70. The Monte Carlo p5 tail is $187 — all 1,000 correlated stress draws land above today's price.
What it sells, where it sells
Operating segments
Corporate Finance & Restructuring (~41%) is the counter-cyclical engine — it rises when macro deteriorates (COVID +26%; now riding the Spirit/Saks/Azul/Prax bankruptcy wave). Economic Consulting (~19%) is the drag: Compass Lexecon swung to a Q1'26 segment loss and needs a multi-quarter rebuild. That divergence is the whole debate.
Country mix (revenue-weighted CRP input)
~63% US with a thin developed-market overlay (UK, Australia, Germany, Canada, France) — aggregate country-risk premium is only ~0.42%, so FCN is effectively a US-risk name. The Brazil (4%) and China (2%) tails carry what little EM risk there is.
Background — five things to know before the case
Context the share price doesn't carry on its face. Skim this once and the bull / bear bullets below stop reading as inside baseball.
- Counter-cyclical professional-services platform, not a single-line consultancy. Five stable segments — Corporate Finance/Restructuring, Forensic & Litigation, Economic Consulting (Compass Lexecon), Strategic Communications, Technology — built from $30M to ~$3.8B revenue. Restructuring rises precisely when the economy turns down.
- Revenue more than doubled organically over the decade ($1.76B → $3.79B, ~7.2% CAGR). The platform-building M&A (FD, Lexecon/Compass, Ringtail) all predates 2014; the last decade's growth is almost entirely organic senior-hire investment, not acquisition.
- Aggressive buyback-and-cancel — the standout capital-return signal. Share count cut 35.9M (2024) → 30.1M (Q1'26), ~16% in ~18 months; $858.6M repurchased in FY25; $2.3B aggregate authorization with a fresh $500M added Oct 2025. Executed counter-cyclically (cheapest buys at $33-43 and $100-109 historically).
- Insiders bought the May-2026 dip with real cash. CEO Gunby bought $1.13M at $151 (Oct 2025) and 10,000 shares at ~$144 (13 May 2026); interim-CFO Linton bought 2,400 at $144 the same day — after 2024 sales at $206-225. Sell-high / buy-low, i.e. aligned.
- Eleventh straight year of adjusted-EPS growth, FY26 guidance reaffirmed at Q1. $3.94-4.10B revenue, $8.90-9.60 EPS — held despite the Q1'26 margin compression and the Compass Lexecon loss, signalling management views the Economic Consulting trough as transient.
Where we diverge from the sector
Each row asks: if we'd used the sector median for this one assumption instead of our override, how much would the share price change? Negative = our override is more conservative (worth less); positive = more aggressive (worth more). Skim down the rightmost column to see which bets are doing the work.
The story & the five claims
The 10-year story this DCF is built on, plus the five anchor claims that translate the story into engine inputs.
The 10-year story
FTI Consulting is a counter-cyclical professional-services compounder trading at a margin trough the market has mistaken for a structural break. Its core Corporate Finance & Restructuring franchise (~41% of revenue) is accelerating — riding the biggest global bankruptcies — while the Economic Consulting (Compass Lexecon) segment is in a visible, multi-quarter rebuild that is depressing the consolidated operating margin to ~10.2% (vs a through-cycle 10-13% band). The base case is not heroic: revenue compounds ~6% a year fading to a risk-free 4.2% terminal, from $3.9B today to ~$6.6B by 2035, and the operating margin recovers only to 11.5% — the mid-band, explicitly not the 13% FY19 peak, because the forgivable-loan/star-talent comp model and AI billing-rate pressure cap it. The aggressive buyback-and-cancel program is valued as a shrinking share count, not as growth. Even on those deliberately modest inputs the stock is worth $219 against a $160 market.
Two debates worth pressure-testing
- We value FCFF, not the buyback-manufactured EPS streak. Sell-side anchors on the 11th straight year of adj-EPS growth; a chunk of that is a shrinking share count. The engine credits the buyback as fewer shares at the end, never as growth — so our case rests on cash flow, not financial engineering.
- Margin capped at 11.5%, not the FY19 13% peak. We price in only a partial recovery off the trough. Full peak-margin restoration is upside we deliberately leave in the Monte Carlo right tail (p95 $247), not the base.
- Sales-to-capital relaxed to 2.5 on the council's double-count catch. The original 2.0 build charged the forgivable-loan people-cost twice (once in the margin, once in reinvestment). At 2.5 the OCF-below-earnings gap is treated as the mean-reverting timing item it is.
- Regression β discarded for the sector β. The 5Y regression came back ~0 (implausible for a $4.8B equity); we used the Damodaran-global Business & Consumer Services β_u 0.908 re-levered to 1.01 → cost of equity 8.92%. A genuinely lower beta would only widen the undervaluation.
- Compass Lexecon's loss is structural, not cyclical. If the Economic Consulting weakness is senior-economist departures and fee compression rather than a rebuild, ~19% of revenue carries a permanently lower margin — the 11.5% recovery slips toward 10.5% and intrinsic compresses toward the low-$190s.
- AI compresses billing rates faster than it expands volume. If AI commoditizes the Technology/e-discovery and review work before TAM expansion offsets it, the margin stays at the ~10.2% trough and terminal growth fades below the risk-free — the bear margin case.
- The forgivable-loan arms race never mean-reverts. If net loan advances stay persistently positive (retention costs keep rising), FCFF runs permanently below accrual earnings and the sales-to-capital 2.5 is too generous — pushing the fair value back toward the 2.0-build $213.
- Debt-funded buyback at a negative-OCF moment. The new $300M term loan funds repurchases that operating cash isn't yet covering; if the cash-conversion trough persists, net debt climbs and the buyback pace (the per-share engine) has to slow.
Risks to thesis (tail, not bear case)
Economic Consulting (~19% of revenue) swung to a Q1'26 segment loss. If the rebuild is structural (economist departures, fee compression) not cyclical, the consolidated margin recovery to 11.5% slips — ~$25/share at risk.
Goldman's PT cut cites AI risk to advisory/e-discovery. If AI compresses billed hours faster than it expands dispute/data volume, the margin stays at trough and terminal growth fades — the single largest model swing.
OCF fell $395M→$152M on retention loans. If net advances never mean-revert, FCFF stays below accrual EPS and sales-to-capital 2.5 is too kind — pushing fair value toward the 2.0-build $213.
A new $300M term loan funds repurchases operating cash isn't yet covering. Net debt $557M is modest (14.6× coverage), but a prolonged cash-conversion trough would force a slower buyback — the per-share engine.
Restructuring and litigation mandates are event-driven; quarters are lumpy (jobs roll off, start late). Secularly growing, but headline-volatile — a sentiment risk, not a thesis risk.
Transactions, transformation and antitrust work lever to M&A volume. A deal-market freeze would soften the pro-cyclical segments — partly offset by the counter-cyclical restructuring book.
10-year forecast
Revenue $3.87B → $6.59B over 10y (6% Y1-5 fading to a 4.2% terminal). Operating margin recovers from 10.4% Y1 to 11.5% by Y5 (mid of the 10-13% through-cycle band) and holds — a partial recovery off the trough, not the FY19 13% peak.
Monte Carlo distribution
Even at the 5th-percentile outcome ($187), intrinsic value exceeds today's $159.70 by 17% — across 1,000 correlated draws on growth, margin, sales-to-capital and terminal growth, not one lands below the market.
Mean $216.17 ± $18.16/sh, 1000 iterations (0 failed). P(intrinsic < market $159.70) = 0.0%.
Cost of capital build
| Risk-free rate | 4.20% |
| Mature-market ERP | 4.23% |
| Levered β | 1.01 |
| Weighted CRP | 0.42% |
| Cost of equity | 8.92% |
| Pre-tax cost of debt (synth Aaa/AAA) | 4.60% |
| D / V | ~14% |
| WACC | 8.18% |
Full year-by-year DCF
| Year | Revenue | Op mgn | EBIT | EBIT(1−t) | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | $4.11B | 10.44% | $429M | $328M | $93M | $235M | $217M |
| 2 | $4.35B | 10.70% | $466M | $356M | $99M | $258M | $220M |
| 3 | $4.61B | 10.97% | $506M | $387M | $104M | $283M | $223M |
| 4 | $4.89B | 11.23% | $549M | $420M | $111M | $310M | $226M |
| 5 | $5.18B | 11.50% | $596M | $456M | $117M | $339M | $229M |
| 6 | $5.48B | 11.50% | $630M | $480M | $117M | $363M | $227M |
| 7 | $5.77B | 11.50% | $663M | $503M | $116M | $388M | $224M |
| 8 | $6.05B | 11.50% | $696M | $526M | $113M | $412M | $220M |
| 9 | $6.33B | 11.50% | $727M | $548M | $110M | $437M | $216M |
| 10 | $6.59B | 11.50% | $758M | $568M | $106M | $462M | $211M |
Methodology & flags
Damodaran FCFF DCF, 10y explicit + perpetuity, in USD. Risk-free
4.20% (local-currency government bond). Synthetic credit Aaa/AAA.
CRP 0.42% from revenue-weighted country mix × Damodaran 2026 CRPs.
Terminal ROIC faded to 14.00%; 0% governance haircut applied
post-DCF. Monte Carlo: 1000 iterations. Engine v1.0.0 · result:
/Users/valentin/Documents/notes_jiliac_labs/Finance/Damodaran/valuations/fcn/output/2026-06-07-result.json
- R&D cap: OFF · Lease cap: OFF · Failure: OFF · ESO: OFF
- Sensitivity tornado: not run