Consulting Group Elixir (LSE: ELIX) made an excellent run late. Elixir’s share price rose 183% last year. This is an increase of 23% this week alone.
Here I consider whether Alexi’s shares could climb faster.
Elixir: A business is growing fast
The reason for the rise in Elixir’s share price this week is the company’s interim results, released on Monday. They have shown strong business growth. Revenue increased 77% compared to the same period last year. Pre-tax profits showed a more impressive increase, 145%.
There is much more to the company’s financial performance. Debt Free Business Net Cash £ 21.1m. This is a report “Strong Pipeline For the rest of the year”, Leading the company’s board to upgrade its full-year revenue expectations for the second time.
So far so good. Here in my portfolio is a shadow of the kind of growth that is seen in a company, S4 Capital, Which has also improved its own expectations for the year more than once.
The challenge of scaling advice
However, it is worth noting that while the S4 has a pure digital focus, Elixirr is using a more traditional tactical consulting business model. It styles itself “Challenger Consultancy” But in the end, consultants rely on skilled professionals to pay and win jobs. So even if a lot of the work is distributed digitally, I still see the underlying limitations of the scalability of Elixir’s business model.
For example, consider the company’s comments as part of its growth strategy on intermediate results. Beneath the growth column “Expanding existing partners “, The company stated that it “Earnings per client-facing partner in H1 21 have increased as the partner team continues to grow”
It reflects in advisory ways where earnings can increase. They can get fee earners to bill more, hire more staff, or a combination of both. Elixir seems to be doing well because of the strong growth of the half. But such an approach has inherent limitations. This includes ceiling prices acceptable to customers and the availability of the right talent pool. A consultancy model that relies on fee earners is limited to how many customers it can serve without significantly adding to its cost basis. This is not equally true of the digital business model.
Elixirr share price and expectations
Although the first half performance was great, the numbers are still fairly modest. Revenue was £ 24 million and pre-tax profit was £ 6.4 million.
The company has a market cap of £ 312m. Uses interim earnings, which is approximately equal to the potential value-to-earnings ratio of 24. I think it’s high for any advice. An important part of what distinguishes advice from competitors is their people. But they can come out the door any day of the week. Elixirr’s intellectual property, client relationships, and reputation give it some competitive advantage. But at its heart, a counselor relies on retaining talent. It can be expensive to do, eat at a profit.
I’m fascinated by Elixirr’s growth rate. But I think the appraisal for a consulting business looks full. Given the investor enthusiasm shown this week, I think the better news could see Alexi’s share price rise more dramatically. But I will not buy.
Christopher Ruan owns shares in S4 Capital. Motley Flower UK has no position on any of the shares mentioned. The opinions expressed in the companies mentioned in this article may differ from those of the authors and therefore the official recommendations we make on our subscription services such as Share Advisors, Hidden Winners and Pro. Here at The Motley Flower we believe that considering a variety of insights makes us a better investor.