Description

Investment Summary: First Consulting Group (FCGI: $5.87) revisited. This idea was first presented on VIC about a year ago; those VIC members who ranked it 4 or less were apparently more astute than the original author (me). Both the business (healthcare IT outsourcing, consulting and systems implementation and integration) and the stock price are largely unchanged, yet the largest impediments to value realization (Chairman/CEO, cost structure) have recently been removed/addressed.

The new Chairman (highly regarded CEO of VeriFone - PAY) recently bought 50K shares (@$6.09) and announced a long overdue corporate expense restructuring. An external search for a CEO has begun.

While we were early enough to flirt with being wrong, the upside remains sufficient to cover a year of opportunity cost in our view.

25M shares @ $5.84 = $146M mkt cap
$30M ($1.20/share) net cash
$116M EV = 46% of current $250M rev run rate. Currently about breakeven.

Based on conversations with multiple industry sources including competitors and customers we believe that ebit margins in the 5-10% range are readily available/achievable in FCGI’s mix of business, albeit not with the prior management or cost structure. At the midpoint of that range, ebit would be about $19M, implying a 16% yield on current EV of $116M. Note both D&A and Capex historically ran $6-8M, although both may decline going forward.

A 7.5% ebit margin = $0.45 EPS, X-cash of $1.20/share.

Further, the healthcare IT sector continues to consolidate and most transaction (admittedly of reasonably profitable companies) have averaged north of 1X revs. At 0.46X revs, a fixed FCGI has meaningful upside.

FCGI should be profitable in Q1-06.

FCGI should be FCF positive in Q1-06 and beyond.

All of the above #s assume zero revenue growth, yet the industry continues to report solid 5-15% growth depending on business segment.

Once profitability is firmly established, buybacks or dividends are likely to be strongly considered.

The recently announced restructuring eliminates 20% of the Corp VP’s and $7M of annual expense. Apparently, Luther made everyone a VP.
In addition, other headcount and space reductions should save another $5M /year.

We understand, although we have been unable to confirm, that a former board member of a recently acquired FCGI competitor has accumulated a reasonable block of stock.

We believe that new management (and a likely reconstituted board) will continue to pull costs out and refocus marketing on more profitable middle market business (Luther was an elephant hunter, and when he won, he usually lost).

A refocused and more profitable FCGI is likely to prove an enticing acquisition candidate, but should deliver substantial value from a straightforward turnaround even absent a strategic transaction.
Description:

Business Summary

The company essentially does 3 things:
1) IT outsourcing - they take over a hospital or health plan's IT department
2) Consulting on implementation/integration of a 3rd party (e.g. Cerner) system.
3) Clinical/Regulatory software package aimed at pharma/biotech (45 customers)

In general, a more complex IT environment within hospitals should be creating new
business for FCGI. As a hospital's IT budget grows in size (above 3% of total), the
8-12% of savings that outsourcing might offer becomes more compelling. The company
is targeting small to mid-size clients to avoid being priced out of the market by
bigger players.

Catalyst:
Margin/EPS/FCF recovery
New mgmt/Board
Use of Net Cash/FCF
Strategic Transaction in Consolidating industry.

Catalyst

Margin/EPS/FCF recovery
New mgmt/Board
Use of Net Cash/FCF
Strategic Transaction in Consolidating industry.