Benefiting from the Subprime Fallout

When our nation faces big problems, Americans usually rise to the challenge, rallying around each other and working to find solutions. And then we sue. So, given that certain companies prosper when lawsuits fly and that suits over the subprime mess and other recent financial calamities are likely to drag on for years, it's worth looking for companies that benefit from our love for litigation.

One, Navigant Consulting (symbol NCI), seems especially promising. As its name suggests, the Chicago-based company provides consulting services to businesses around the world. It specializes in helping companies that are suing or being sued.

By Navigant's own estimate, these are boom times for the type of work it does. According to a Navigant study, about 280 lawsuits related to the subprime mortgage meltdown were filed in 2007. That's already half the number of suits filed over many years as a result of the savings and loan debacle of the early 1990s. A lot of additional subprime-related suits are likely.

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A better business environment (better for Navigant, bad for many financial companies) is already boosting revenues. So are a string of acquisitions. Navigant's top line has grown handsomely the past three years: $575 million in 2005, $681 million in 2006 and $767 million last year.

Until recently, the profit picture hadn't been as pretty. A couple of punk quarters last year pushed the stock down from $22 in 2007 to $11 in January. But the company turned things around in the first quarter. It earned $11.8 million, or 25 cents a share, up from 22 cents in the same period of 2007 and beating analysts' estimates by a nickel a share. The stock rebounded sharply and closed June 17 at $18.05.

The future looks bright. Says analyst William Sutherland of the investment firm Boenning & Scattergood: "We are increasingly convinced that NCI has done significantly more to date than its competitors to position itself for the subprime opportunity." Sutherland says the recent acquisition of Chicago Partners, a management-consulting firm, should boost Navigant's 2008 revenues by $30 million.

One potential negative was the announcement on June 9 that chief financial officer Scott Krenz plans to resign. Krenz, who left to take another job, was credited with several important profit-boosting initiatives. The stock dipped mildly after the announcement, suggesting that investors were not overly concerned. Neither is Sutherland.

Analysts on average expect Navigant to earn 95 cents a share in 2008, up from 77 cents last year, and $1.16 in 2009. The stock trades at 19 times estimated 2008 profits, which analysts see growing 17% a year over the next few years. Add the strong possibility that Navigant will beat earnings forecasts, and the stock looks like a good deal.