Sunday, August 2, 2009

Huron Consulting Group (NASDAQ: HURN), Cash For Clunkers, And Other Disasters From The Past Week

So another week here in Absurdistan passes by.
One individual security which captured my attention was Huron (NASDAQ: HURN). It is basically a bunch of old Arthur Andersen guys doing consulting work. The business model is typical for a consulting firm (or a law firm or an M&A shop or an accounting firm): a few revenue producers bring in business, and the little people do the work. The revenue-producer and the company make the difference between what they charge for their services and the cost of labor for the little people. They compete with a number of substantially better branded private names, such as McKinsey and BCG (yes, also with Deloitte, Booz Allen, etc. yes, even CRA, Diamond Cluster, Opera, and so on). Anyway.

So HURN on Friday closed at $44.35, and went on tank massively after-hours, something like 60% off. So what happened?
-- fired CEO, CFO and CAO (aka "resigned immediately")
-- turns out Huron employee/s have been getting kickbacks from the firms they acquired (and they have been growing massively by acquisitions)
-- expecting the auditors to find material internal control weaknesses (wow! you mean PwC were asleep at the wheel? I am shocked!)
-- non-reliance on previous financial statements warning
-- preliminary EPS impact: '06 -14%; '07 -42%; '08 -75%; Q1 - 37%
--they also guided down for the year after reaffirming in June: either the business tanked or they are clueless about it. Either one is bad.

My prediction:
-- with this scandal, they will not be able to generate as much new business: every competitor will kick them
-- consulting right now is pretty slow anyway and these guys shot themselves in the foot
-- whole teams will be jumping ship to competitors, and that is revenue gone forever
-- I think they are levered around 2.6x-3.6x their adjusted '08 EBITDA, which in my view on the high end of the spectrum for a service business with no hard assets. Note that this is my adjusted EBITDA (EBITDA + bribe payments). They adjust their EBITDA by adding back stock-based comp which is complete and utter B.S. Yes, it is non-cash but it is something that would have been paid in cash as a compensation expense if there were no options
-- Heavily into healthcare and education consulting, which I think will be getting trimmed much more in the future

Now on to cash for clunkers. Is Congress largely a collection of lunatics? It sure seems so. I wrote about how dumb/thinly veiled this program is back when it first came about in early May, and I was hoping that it would not go through. Well, it did and it they just tripled the size of the program. Idiots. The auto companies learned the hard way over the last year and a half that heavy incentives simply pull demand forward. They do not create new demand. New demand comes from gradual amortization. Now people are turning in perfectly good running cars which get junked purposefully. This is the most retarded thing ever for a program ostensibly created for ecological improvements. And Congress is patting itself on the back because it is so successful! Well, how about simply sending checks to the taxpayers and see how many people cash them. I bet it would be over 99% so it would have a way better reach than an auto program (which inherently discriminates against mass transit users, as well as people who were smart and bought good mpg vehicles as I described earlier this year.) I am against stimuli of any kind BTW. How about reducing government spending, huh? The idiots that are in charge of the federal government came up with brilliant ideas, such as double-sided copying to save $100 mm. Innumeracy, I guess. Cutting $1 out of every $10,000 is more than insignificant: it is insulting.

Now on to the economic reports. The two numbers this week were the initial claims and GDP. What you need to know about the unemployment numbers is that once the benefits run out, a person is no longer considered "unemployed" by our brilliant, well-fed statisticians at the BLS. Only in Absurdistan, of course. So what has been happening actually? One, the auto sector messed up its traditional lay-off pattern for the summer so the seasonal adjustments are off. Second, and more important, you have people using up not only the 26 weeks of standard unemployment aid but the 72 weeks of extra federal and state aid. But...they are not part of the "number." They will continue to grow: anecdotally, someone I know at big bank X had a decent opening (MBA-level associate). In a few days, they got over 600 applications for this one place.
The best graphic representation of the expanding periods of unemployment is here towards the bottom. More green shoots believers added daily.

The second number is the GDP. Here again we have our brilliant, well-fed statisticians moving the goal posts. The GDP calc was revised, and they went back to restate the numbers from the last few years. Turns out that the decline in the GDP was much more severe and started out earlier than before. Second, only declining net imports and government spending helped. This is not a good way to progress in an economy. See this and this. Now remember that the government does not have the money it spends: it borrows a part from China/ROW and it prints the rest.

Everything's great, folks, buy, buy, buy! Yahoo says the recession is over or nearly so. "Recession end seen..." Let me spell it out. There will not be a recovery. Things are not going back to "normal." This and worse will be new normal. You will not have stabilization until both residential and commercial RE prices have stopped falling, the banks have taken the losses (instead of suspending MTM accounting), the U/E rate has peaked, the deficits are under control and there is an economy-wide debt to equity conversion. It has not been painless and it will not get any better for a long time. Partially because of the neverending cluelessness of the people in charge. Ever wonder why oil is at $66 in the midst of the worst recession since the 1930's? That's another topic.

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