Exponent

A consulting firm with a PhD

Sometimes tragic and terrible things happen. I don't mean megalomaniac rulers trying to expand their empire by force, I really mean accidents and disasters. Sometimes a plane crashes out of the blue, sometimes a hotel floor caves in, or an important component in a car comes loose in a storm. In most cases, it isn't easy to determine a cause right away - so it's a clear case for the pros.

The American company Exponent Inc. is exactly that kind of technical and scientific consulting firm, offering solutions to complex problems. It specializes in analyzing failures and machine breakdowns in detail and in delivering important insights preventively, already during product development. Apart from that, it supports its clients with all urgent and complicated questions concerning human health, the environment and technical regulations related to new innovations and processes. More than 70 percent of its over 1,200 employees hold an academic degree in their field, and around 55 percent of the workforce even hold a doctorate. So as investors, we have the chance here to invest in the brightest minds of our time.

The history and business model of Exponent Inc.

The story of today's consulting firm begins on May 9, 1936, when Alan Stephan Tetelman was born in New York City. He was a bright and inquisitive boy. After graduating from Riverdale High School, he attended Yale University, where he successfully earned first his bachelor's, then his master's and finally his Doctor of Science in metallurgy. Even back then, his dissertation caused quite a stir among experts - it was called an experimental and theoretical masterpiece. He then spent a year as a National Science Foundation postdoctoral fellow at the University of Paris before returning to the United States and joining the scientific laboratory of the Ford Motor Company. Within a few years, Alan built an international reputation, left Ford and began teaching as a professor at Stanford University.

Besides his expertise in metallurgy, Alan also had an excellent nose for lucrative business. When he noticed that law firms and insurance companies regularly consulted experts on all kinds of topics and needed competent analyses and expert reports, he didn't hesitate and discussed the idea with his colleagues. In April 1967, while having lunch with two other Stanford professors and two engineers from the Stanford Research Institute at The Oasis, a burger joint in Menlo Park, they spontaneously founded their own consulting firm together, named Failure Analysis Associates (FaAA). Alan joked about the company name: one third of California start-ups were failures and the remaining two thirds were only doing analysis. The young founding team was extremely well connected with other experts, so they could always draw on the necessary expertise whenever it was needed. In the early years, the focus was on analyzing structural and system failures, such as pipeline leaks, in the utility and nuclear power industries. Gradually, the firm expanded the industries in which it offered failure analysis. Government agencies also regularly relied on FaAA's excellent expertise. When a Navy plane crashed in September 1978, Alan promptly set off from Sacramento to San Diego to determine the cause of the crash. Tragically, the airliner he was on collided with a private Cessna, killing a total of 144 people.

In the following years, new scientific disciplines were added, including civil engineering, electrical engineering, biomechanics and data analysis. In 1985, the company acquired a 147-hectare test site where it could recreate peak vehicle performance and road collisions under almost any conditions. The insights gained there supported the auto industry in its product development. Toward the end of 1990, the company went public on the NASDAQ under the ticker FAIL. With the fresh capital from the IPO, it made a series of sensible acquisitions, and since it was becoming more and more broadly positioned and by now offered far more than just failure analysis, it decided to change its name in 1998. Exponent Inc. has developed excellently since then. Today, the consulting firm covers more than 90 different technical and scientific disciplines and has 30 offices in the US, the UK, Switzerland and Asia.

How could Exponent develop in the future?

First, I'd like to briefly summarize the consulting firm's business model once more. Exponent is a scientific and technical consulting company that, roughly speaking, offers solutions to complex problems that companies and government agencies face every day. It employs more than 1,200 people, made up of scientists, engineers, management consultants and regulatory experts. As mentioned in the introduction, the vast majority of employees hold an academic degree in their respective field - more than half of all employees even hold a doctorate or higher scientific degrees.

Now let's take a look at the figures for the most recently published quarter (Q4 2021 - ended 12/31/2021) and, along with it, the full year 2021. In the fourth quarter, total revenue was 113.5 million US dollars, an increase of 9.9 percent compared to the prior-year quarter. Due to some higher expenses, net income fell from 21.8 million US dollars in Q4 2020 to 20.4 million US dollars now. For the full year 2021, revenue of 466.3 million US dollars was a proud 16.6 percent above the previous year's result. Profit also rose nicely: while it was 82.6 million US dollars in fiscal 2020 (1.55 US dollars per share), Exponent earned a profit of 101.2 million US dollars, or 1.90 US dollars per share, in fiscal 2021. Now that's nice growth, isn't it?

As far as I can tell, Exponent is in a nice upward spiral. It keeps getting more contracts because it has the right employees with the know-how. And it keeps getting more employees because it secures important and large contracts. Our world is getting more and more complex, and with topics like sustainability or artificial intelligence, quite a few questions are still open. So Exponent's order books should be well filled in the coming years too. And to stay well positioned in the future, the company not only invests in training its employees but also buys suitable companies. All in all, I have to say Exponent looks pretty promising.

What about the dividend?

Exponent shareholders have only been receiving a share of the profits in the form of dividends since 2013. Before that, the consulting firm used its profits to grow and to buy suitable acquisition targets. Since it started paying dividends, Exponent has managed to raise the dividend every year - at a remarkable pace. Over the last 5 years, the average dividend growth rate is a strong 17.7 percent. With numbers like that, the current dividend yield of 0.8 percent suddenly looks much more attractive. The payout ratio of 44.2 percent is also impressive. Enough money stays in the company to keep growing in the future and to keep raising the dividend over the coming years.

Conclusion:
Exponent Inc. has grown from a small 5-person team of experts into a globally active consulting firm with remarkable growth. Corporate clients won't be able to do without Exponent's expertise in the future either, which is why I'm quite optimistic about the company's future. Long-term investors should definitely take a closer look at this stock.