Exponent (EXPO)

Scientific consulting firm Exponent (NASDAQ:EXPO) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 6% year on year to $145.5 million. On the other hand, next quarter’s revenue guidance of $130 million was less impressive, coming in 3.8% below analysts’ estimates. Its GAAP profit of $0.52 per share was 8% above analysts’ consensus estimates.

Company Overview

With a team of over 800 consultants holding advanced degrees in 90+ technical disciplines, Exponent (NASDAQ:EXPO) is a science and engineering consulting firm that investigates complex problems and provides expert analysis for clients across various industries.

The sector stands to benefit from ongoing digital transformation, increasing corporate demand for cost efficiencies, and the growing complexity of regulatory and cybersecurity landscapes. For those that invest wisely, AI and automation capabilities could emerge as competitive advantages, enhancing process efficiencies for the companies themselves as well as their clients. On the flip side, AI could be a headwind as well as the technology could lower the barrier to entry in the space and give rise to more self-service solutions. Additional challenges in the years ahead could include wage inflation for highly skilled consultants and potential regulatory scrutiny on outsourcing practices—especially in industries like finance and healthcare where who has access to certain data matters greatly.

Exponent competes with other technical consulting firms such as Charles River Associates (NASDAQ:CRAI), FTI Consulting (NYSE:FCN), and Rimkus Consulting Group (private), as well as with the internal engineering and scientific departments of large corporations and specialized boutique consulting firms in specific technical niches.

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years.

With $526.8 million in revenue over the past 12 months, Exponent is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

As you can see below, Exponent’s 5.8% annualized revenue growth over the last five years was decent. This shows its offerings generated slightly more demand than the average business services company, a useful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. Exponent’s annualized revenue growth of 5.3% over the last two years aligns with its five-year trend, suggesting its demand was stable.

This quarter, Exponent reported year-on-year revenue growth of 6%, and its $145.5 million of revenue exceeded Wall Street’s estimates by 8.1%. Company management is currently guiding for a 1.8% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 3.1% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges.

Exponent has been a well-oiled machine over the last five years. It demonstrated elite profitability for a business services business, boasting an average operating margin of 24.5%.

Analyzing the trend in its profitability, Exponent’s operating margin rose by 6.9 percentage points over the last five years, as its sales growth gave it immense operating leverage.

This quarter, Exponent generated an operating profit margin of 30.5%, up 8.2 percentage points year on year. This increase was a welcome development and shows it was more efficient.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Exponent’s unimpressive 5.1% annual EPS growth over the last five years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.

In Q1, Exponent reported EPS at $0.52, down from $0.59 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 8%. Over the next 12 months, Wall Street expects Exponent’s full-year EPS of $2.05 to shrink by 1.2%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Exponent has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 25.6% over the last five years.

Taking a step back, we can see that Exponent’s margin dropped by 7 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Exponent hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 43.6%, splendid for a business services business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Exponent’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Companies with more cash than debt have lower bankruptcy risk.

Exponent is a well-capitalized company with $245.1 million of cash and $80.12 million of debt on its balance sheet. This $165 million net cash position is 4.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Exponent blew past analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed significantly and its full-year revenue guidance fell slightly short of Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $77.82 immediately following the results.

Updated: May 22, 2025 at 11:56 PM EDT

Are you wondering whether to buy Exponent or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Exponent isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was decent over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, the downside is its subscale operations give it fewer distribution channels than its larger rivals.

Exponent’s P/E ratio based on the next 12 months is 37x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $92 on the company (compared to the current share price of $77.43).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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