CRA International, Inc. (CRAI) – Poised for Growth Amidst Shifting M&A Landscape
In their Q1 2024 investor letter, Riverwater Partners’ Micro Opportunities Strategy featured a deep dive on CRA International, Inc. ($CRAI), a leading global consulting firm offering economic, financial, and strategic expertise to major law firms, corporations, accounting firms, and governments worldwide. Portfolio manager Nathan Fredrick and his team believe $CRAI is well-positioned for growth due to its strong market position, impressive employee retention rates, and anticipated revitalization in M&A activity.
Key Points:
- Antitrust and competition expertise
- $CRAI’s cornerstone is the antitrust and competition domain, making up roughly 40% of sales.
- With large M&A transactions facing increasing scrutiny from regulatory bodies, $CRAI’s expertise is becoming more valuable.
- $CRAI played a significant role in the high-profile Microsoft/Activision Blizzard merger, ultimately helping secure approval.
- Impressive client base and employee retention
- $CRAI collaborates with 82 of the Fortune 100 companies and 97 of the top 100 law firms.
- The company boasts exceptional employee loyalty, with half of its senior staff maintaining tenure of more than five years, and a quarter surpassing ten years.
- Strong retention rates are crucial in the consulting industry, directly influencing the firm’s capacity for revenue growth.
- Anticipated revitalization in M&A activity
- Riverwater Partners anticipates a rebound in M&A activity, driven by declining treasury rates, accommodative financial conditions, and an expected easing cycle by the Federal Reserve.
- Historical trends suggest that M&A transactions rarely decline for three consecutive years, further supporting the thesis.
- Regardless of the election outcome, $CRAI is expected to benefit from either rigorous enforcement under a Democratic administration or increased overall M&A activity under a Republican one.
- Business momentum and financial performance
- $CRAI’s lead flow growth has been growing double digits, and the company has started to convert its pipeline into sales.
- Higher consultant utilization rates should drive higher margins and earnings.
- Over the past six years, $CRAI has achieved an 8% CAGR in revenue and set a sales record in 2023, despite a subdued market environment.
- Shareholder-friendly capital allocation
- $CRAI has demonstrated a strong commitment to shareholder value, aiming to distribute 50% of its cash flow from operations to investors.
- Over the past decade, management has effectively reduced the shares outstanding by more than 30%.
Riverwater Partners’ investment thesis for $CRAI is built on several key pillars: exemplary leadership, a business and financial profile at an inflection point, and the potential for sustained growth over time as a compounder. The firm maintains regular communication with $CRAI’s management, further reinforcing their confidence in the company’s prospects.
In Q1 2024, CRA International emerged as the top contributor to the Micro Opportunities Strategy, driven by better-than-expected earnings and strong guidance for the year ahead. As $CRAI continues to capitalize on its growing pipeline and the anticipated resurgence in M&A activity, Riverwater Partners believes the company is poised for significant growth in the coming years.
Click here for the full investor letter.
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