Exponent, Inc.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 5/5

Exponent, Inc. is a scientific and engineering consulting firm, providing technical expertise to solve complex problems across a variety of industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Exponent, Inc. (EXPN) provides science and engineering consulting services with a focus on failure analysis, accident investigation, and product development. Unlike companies directly selling consumer products, Exponent relies on its deep pool of experts in many fields to resolve challenging technical issues for clients across multiple industries.

Business Overview

Exponent operates primarily through its Engineering and Other Scientific segment, which generates the majority of its revenue. It caters to a diverse clientele across various sectors, from manufacturing and technology to healthcare and transportation. The company’s revenue model is project-based, where clients hire Exponent’s experts to solve unique problems, often involving complex analysis of past events or detailed projections for the future.

  • Revenue Distribution: Exponent reports its revenues from two main segments: Engineering and Other Scientific and Environmental and Health. These segments are further broken down by geographic location with the United States bringing in 83% of the revenue, followed by Asia and Europe at 8% and 9%, respectively, in the most recent quarter.

While the majority of Exponent’s revenue is generated from the US, they also have a presence in Europe and Asia.

*   _Engineering and Other Scientific:_ Provides services in a wide array of industries including:
    *   Biomedical engineering
    *   Buildings & Structures
    *   Civil engineering
    *   Construction consulting
    *   Data sciences
    *   Electrical engineering
    *   Human factors
    *   Mechanical engineering
    *   Polymer science & materials chemistry
*   _Environmental and Health:_ Provides services related to:
    *   Chemical Regulations & Food Safety
    *   Ecological & Biological Sciences
    *   Environmental & Earth Sciences
    *   Health Sciences *   **Industry Trends:** Consulting services are always needed for innovation, safety, regulatory compliance, and risk management. Companies face ever-increasing regulations and the need to innovate and improve and become more sustainable at the same time. Exponent is particularly well positioned in providing those services. They are able to bring technical knowledge of a broad array of sectors, allowing the company to cross-sell services that would otherwise remain within siloes.

The industries that Exponent operate in can be volatile and are greatly dependent on external conditions, that can change a lot, therefore diversification of clients and geography is critical.

  • Competitive Landscape: The consulting industry is highly competitive, with both large consulting firms and specialized niche players. Companies like McKinsey, Boston Consulting Group, and Accenture compete with Exponent, offering broader management solutions. However, many competitors do not have the breadth and depth of science and engineering expertise found in Exponent, allowing them to compete in areas many can’t.
  • Differentiation: What sets Exponent apart is its multidisciplinary, scientific approach to problem-solving, coupled with a high level of technical expertise in many industries. They have a team of experienced engineers and scientists which are often former industry executives and regulators. This niche focus makes them a valuable partner for companies facing unusual, technical problems. They also benefit from the reputation that the name Exponent has, which also helps with employee retention.

Financials

Exponent’s financials reflect a well-managed business with consistent profitability.

  • Margins: The company maintains healthy profit margins. Their recent quarter showed that gross margin is 46.8% and operating income is 25.2% of revenues. The operating margin has generally trended up over the past few years, implying good cost management and pricing power.

Exponent’s recent quarter shows a significant growth compared to the past. Profitability has expanded and continues to be above its median in the past.

  • Growth: Growth in terms of revenues has been stable, but is projected to grow in the coming years. The average growth in the last 5 years has been 7% and that growth is expected to continue. Their pipeline is strong and with growth comes increased expenses, but even then there is room for operating margins to increase due to the inherent scalability of the business model.

Exponent’s management are aware of the importance of profitability growth over simple revenue growth and plan to keep focusing on efficiency and margin expansion.

  • Balance Sheet: The balance sheet is robust, with a very high amount of cash and low debt, indicating excellent financial health. Exponent’s short-term assets total over $600M and total long-term debt stands at $0, which makes it easy for the company to endure tough times.

Exponent has very little debt and is highly liquid, with $180M in cash, and $370M in marketable securities. This strong financial position gives the company a strong backbone to continue to operate and expand without relying on financing.

  • Cash Flows: Cash flows from operations (CFO) are also consistently positive and are used to further boost the company’s profitability by share repurchases (a form of return to shareholders). Management has also used cash to purchase various companies to expand their service offerings and geographic footprint, but this is kept to a minimum and is only done when opportunities are deemed worthwhile.

Their cash is not left idle; the cash flows generated are used effectively, such as buybacks.

Moat

Exponent has a 3 out of 5 moat. The company benefits from a couple of sources for its moat.

  • Intangible Assets: Exponent’s strong brand reputation and reputation for having a highly qualified experts helps make its services more valued by clients than other consulting firms. Although not formally quantified, reputation is one of their strongest value drivers.
  • Switching costs: Once companies are using Exponent for their consulting needs they are very likely to return. This is in part due to the specific and niche expertise offered by the firm. It is very expensive for companies to change suppliers when dealing with highly complex technical and scientific problems. This gives Exponent pricing power.
  • Cost Advantages: The company can benefit from economies of scale, that help it offer high quality consulting at a lower price than smaller players which may not have access to diverse talent. Also the company’s established process allows for more efficiencies.
  • Lack of a network effect Although there is some network effect as better performing and more prominent employees attract more clients that want their talent and knowledge, the primary driver of the business is not built on a network, and this is a limitation.

Risks to the Moat

Several factors could potentially erode Exponent’s moat:

  • Increased Competition: If other larger consulting or niche firms become more specialized and steal market share away from Exponent through better pricing or a more comprehensive offering, this could cause problems. The specialized consulting space is starting to become more competitive and could erode their historical advantage.
  • Difficulty Retaining Talent: If the company begins to have issues with its staff or loses them to competitors, that could impact their ability to generate revenue or sustain their reputation. The company’s business model is completely reliant on the expertise and quality of their employees, so their well-being must be a high priority.
  • Technological Disruption: While unlikely to cause a complete disruption of the market, technology could change, which can reduce the need for expert opinions. A new technology may come up which makes certain expertises redundant, thereby reducing their competitiveness. This is a threat that should be constantly monitored.
  • Client Concentration: Although their clientele is diverse, some large companies may rely heavily on the firm and any drop in the business provided could cause significant effects in the business’s financial outlook.

In the context of the current environment, Exponent’s management has highlighted that they have increased exposure to legal and regulatory work, which carries higher risk. And although the management has also said that they continue to grow despite this, it is something to keep an eye out for.

  • Economic Downturns: Consulting services can be viewed as discretionary spending for some clients, and therefore, a market slowdown can affect their spending and thereby negatively impact Exponent.

Understandability

Exponent, Inc. is a complex business with specialized services, and that leads to somewhat confusing reports and filings. However, the business model is understandable as the company provides consulting services to various industries that require high-level technical, scientific and engineering expertise. The company does not directly deal with consumers, and there are few complex concepts to follow. This results in a rating of 4 / 5 for understandability.

Balance Sheet Health

Exponent has a very strong balance sheet with no debt and a large pile of cash, which indicates extremely high financial health. Therefore a rating of 5 / 5 for the balance sheet.

  • Debt: As noted before, they have no debt, making it one of the safest investments possible.
  • Liquidity: Their balance sheets shows an extremely high amount of short term assets, such as cash and marketable securities.

Conclusion

Exponent, Inc., presents a unique investment case. It is well-managed, profitable, and has an acceptable moat. Its revenue is diversified in both geography and business type. However, there are risks that must be taken into consideration for any investors before investing, such as increased competition or the possibility of technological disruption.