HACKETT GROUP, INC. (HCKT) stock intrinsic value fair value estimate & owner earnings analysis

The Hackett Group is a mid-sized consulting firm best known for its proprietary benchmarking database, which large companies use to compare the cost and performance of their finance, IT, HR and procurement functions against peers. It also helps clients implement and run Oracle and SAP enterprise software, and in the last two years has added generative-AI consulting and implementation work, partly through the 2024 purchase of LeewayHertz. Revenue comes from three segments: Global Strategy & Business Transformation (benchmarking, advisory, generative-AI work, OneStream and eProcurement), Oracle Solutions and SAP Solutions. Most revenue is earned in the United States, with the rest mainly in Western Europe. The business needs very little capital, so nearly all of what it earns is available to owners. How we measure earnings. We start from operating cash flow and remove short-term swings in receivables and payables, the cost of stock-based pay (a real cost even though no cash leaves the company), and the capital spending needed to keep the business running. Because the company now carries meaningful debt, we value the business before interest and then subtract what it owes. On that basis the business has produced between about $23 million and $45 million in a normal year over the past decade, about $11 million in the 2020 pandemic year, and about $15 million in 2025. We use the median of the full ten years, roughly $28-29 million, as the normal level. That window includes the 2020 downturn and the 2021-2023 boom, so it covers a full cycle for consulting demand. Correction to our earlier figures. Our previous review understated 2024 stock-based pay. The cash flow statement shows $19.5 million of non-cash stock compensation for 2024, which includes $5.7 million for the leadership stock price award and $2.0 million tied to the LeewayHertz acquisition. We had counted only the $11.8 million of regular awards. The corrected 2024 figure is about $1.08 per share, not $1.36. What changed in the business. Revenue fell about 3% in 2025 to $305.6 million, mainly because Oracle Solutions revenue fell $13.0 million after a large engagement ended. The decline has deepened since then: first-half 2026 revenue was $138.1 million, down about 12% from $156.8 million a year earlier. Profit has held up better than revenue because the stock award expense is shrinking. The company also borrowed heavily in 2025 to fund $69 million of share buybacks. Debt on its revolving credit facility rose from $12.7 million at the end of 2024 to $80.9 million in June 2026. That facility matures on November 7, 2027. The 2025 dip. The 2025 drop in owner earnings came mostly from the September 2024 stock price award to the CEO, COO, CFO and other leaders. It cost $16.8 million in 2025, and only $7.1 million remained to be expensed at year end. Most of that $10 million-plus drop falls away in 2026 and 2027. That is the specific, dated reason our base case starts 2026 at about $21 million of pre-interest owner earnings, above 2025's $15 million, even though owner earnings fell about 54% in 2025. The higher starting point comes from the expiring award, not from expected revenue growth. Revenue is still falling, which is why we start below the normal level and only rebuild toward it. Base case. Pre-interest owner earnings go from about $21 million in 2026 to $25 million in 2027, then settle at about $28 million, the ten-year median, as the stock award expense runs off. We assume no growth from Oracle replacement work, generative-AI services or market expansion, because none of it is contracted or proven yet. We hold that level for 20 years, supported by a client relationship and benchmarking record of more than 30 years, then fade it to zero over the following decade. Nothing we can document carries a competitive consulting franchise beyond that. The business is worth about $344 million. Subtracting about $71 million of net debt ($80.9 million borrowed less roughly $10 million of cash beyond operating needs) leaves about $273 million, or about $10.86 per share on 25.2 million diluted shares. Bear case. Revenue keeps falling through 2027 and then meets a demand downturn like 2020, when revenue fell 15% and owner earnings fell to about a third of normal. In this case owner earnings drop to about $7-9 million in 2028-2029 and recover only to about $15 million, held for five years and faded to zero over ten more. This is the outcome if generative-AI tools wear down demand for traditional benchmarking and implementation work. Even at the trough, cash covers the roughly $4-5 million of annual interest, but the November 2027 refinancing would likely come on tighter terms and the dividend would probably have to be cut. The business is worth about $130 million against about $71 million of net debt, leaving about $59 million, or about $2.36 per share. Bull case. Revenue stabilizes in 2027, the stock award expense runs off, and the business returns to about $34 million a year. That is roughly its 2022-2024 level after removing the 2021 peak. We hold it for 25 years and then fade it over ten. The business is worth about $449 million, less about $71 million of debt, or about $15.03 per share. How we set the margin-of-safety price. We are reasonably confident in the normal earnings level, because the past decade shows the range clearly. We are less confident that the business will return to it, because revenue is still falling 12% a year and the company has not yet shown the Oracle decline has stopped. The worst plausible outcome is lasting erosion of advisory demand by AI tools while the company carries about $81 million of revolver debt due in late 2027. The business would survive that. It has no customer above 6% of revenue, needs almost no capital and would still cover its interest, but most of the equity value would go. Our two biggest risks are the level, if normal earnings are closer to $20 million than $28 million, and the duration, if the franchise lasts 10 years rather than 20. Either one would take value to about $5-7 per share. While waiting, the company pays $0.48 a share in dividends, but in 2025 that cost $12.9 million, almost all of that year's owner earnings, so it is not guaranteed. At $6.50 a share, the business cash flow at its normal level is about 12% of the price plus debt. The dividend alone would be about 7% a year, and if revenue stabilizes and earnings return to normal over about three years, the shares reaching our base value would supply the rest of a 20% annual return. Below that price, the bear case still implies a loss, but the gap between the bear and base values is wide enough that the margin-of-safety price applies only once revenue stops falling. Unreconciled items. The 2018 figures carry a modest unresolved gap between two cash flow cross-checks, tied to the reporting of a small business unit sold that year. It affects only that year. Our previous estimates were built on a different basis and are not directly comparable to these.