Intrinsic value of Morneau Shepell Inc. - MSI

Previous Close

$20.20

  Intrinsic Value

$21.04

stock screener

  Rating & Target

hold

+4%

  Value-price divergence*

0%

Previous close

$20.20

 
Intrinsic value

$21.04

 
Up/down potential

+4%

 
Rating

hold

 
Value-price divergence*

0%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of MSI stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  4.41
  6.00
  5.90
  5.81
  5.73
  5.66
  5.59
  5.53
  5.48
  5.43
  5.39
  5.35
  5.31
  5.28
  5.25
  5.23
  5.21
  5.19
  5.17
  5.15
  5.14
  5.12
  5.11
  5.10
  5.09
  5.08
  5.07
  5.06
  5.06
  5.05
  5.05
Revenue, $m
  592
  628
  665
  703
  743
  785
  829
  875
  923
  973
  1,026
  1,081
  1,138
  1,198
  1,261
  1,327
  1,396
  1,469
  1,544
  1,624
  1,707
  1,795
  1,887
  1,983
  2,084
  2,189
  2,301
  2,417
  2,539
  2,668
  2,802
Variable operating expenses, $m
 
  274
  288
  303
  318
  334
  351
  369
  387
  407
  427
  416
  438
  461
  485
  511
  537
  565
  594
  625
  657
  691
  726
  763
  802
  842
  885
  930
  977
  1,026
  1,078
Fixed operating expenses, $m
 
  293
  300
  308
  316
  324
  332
  340
  348
  357
  366
  375
  385
  394
  404
  414
  425
  435
  446
  457
  469
  480
  492
  505
  517
  530
  543
  557
  571
  585
  600
Total operating expenses, $m
  539
  567
  588
  611
  634
  658
  683
  709
  735
  764
  793
  791
  823
  855
  889
  925
  962
  1,000
  1,040
  1,082
  1,126
  1,171
  1,218
  1,268
  1,319
  1,372
  1,428
  1,487
  1,548
  1,611
  1,678
Operating income, $m
  53
  61
  76
  93
  110
  128
  146
  166
  187
  210
  233
  290
  316
  343
  372
  402
  434
  468
  504
  542
  582
  624
  668
  715
  765
  817
  872
  930
  991
  1,056
  1,124
EBITDA, $m
  88
  110
  126
  144
  162
  181
  201
  222
  244
  268
  293
  319
  346
  375
  406
  438
  472
  508
  546
  586
  628
  672
  719
  769
  821
  876
  934
  995
  1,060
  1,128
  1,200
Interest expense (income), $m
  0
  9
  10
  11
  11
  12
  13
  15
  16
  17
  18
  19
  21
  22
  23
  25
  27
  28
  30
  32
  34
  36
  38
  40
  43
  45
  48
  50
  53
  56
  59
Earnings before tax, $m
  38
  52
  67
  82
  98
  115
  133
  152
  172
  193
  215
  270
  295
  321
  348
  377
  408
  440
  474
  510
  548
  588
  630
  675
  722
  772
  824
  880
  938
  1,000
  1,065
Tax expense, $m
  12
  14
  18
  22
  26
  31
  36
  41
  46
  52
  58
  73
  80
  87
  94
  102
  110
  119
  128
  138
  148
  159
  170
  182
  195
  208
  223
  238
  253
  270
  288
Net income, $m
  26
  38
  49
  60
  72
  84
  97
  111
  125
  141
  157
  197
  215
  234
  254
  275
  298
  321
  346
  372
  400
  429
  460
  493
  527
  563
  602
  642
  685
  730
  777

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  774
  820
  869
  919
  972
  1,027
  1,084
  1,144
  1,207
  1,272
  1,341
  1,413
  1,488
  1,566
  1,649
  1,735
  1,825
  1,920
  2,019
  2,123
  2,232
  2,346
  2,466
  2,592
  2,724
  2,862
  3,007
  3,160
  3,319
  3,487
  3,663
Adjusted assets (=assets-cash), $m
  774
  820
  869
  919
  972
  1,027
  1,084
  1,144
  1,207
  1,272
  1,341
  1,413
  1,488
  1,566
  1,649
  1,735
  1,825
  1,920
  2,019
  2,123
  2,232
  2,346
  2,466
  2,592
  2,724
  2,862
  3,007
  3,160
  3,319
  3,487
  3,663
Revenue / Adjusted assets
  0.765
  0.766
  0.765
  0.765
  0.764
  0.764
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
Average production assets, $m
  267
  282
  299
  316
  335
  353
  373
  394
  415
  438
  462
  486
  512
  539
  568
  597
  628
  661
  695
  731
  768
  808
  849
  892
  938
  985
  1,035
  1,088
  1,143
  1,200
  1,261
Working capital, $m
  64
  71
  75
  79
  84
  89
  94
  99
  104
  110
  116
  122
  129
  135
  143
  150
  158
  166
  175
  184
  193
  203
  213
  224
  235
  247
  260
  273
  287
  301
  317
Total debt, $m
  250
  274
  300
  327
  355
  384
  415
  447
  480
  515
  551
  590
  629
  671
  715
  761
  809
  859
  912
  967
  1,025
  1,086
  1,150
  1,217
  1,287
  1,361
  1,438
  1,519
  1,604
  1,693
  1,787
Total liabilities, $m
  412
  436
  462
  489
  517
  546
  577
  609
  642
  677
  713
  752
  791
  833
  877
  923
  971
  1,021
  1,074
  1,129
  1,187
  1,248
  1,312
  1,379
  1,449
  1,523
  1,600
  1,681
  1,766
  1,855
  1,949
Total equity, $m
  362
  384
  407
  430
  455
  481
  507
  535
  565
  595
  628
  661
  696
  733
  772
  812
  854
  898
  945
  994
  1,045
  1,098
  1,154
  1,213
  1,275
  1,339
  1,407
  1,479
  1,553
  1,632
  1,714
Total liabilities and equity, $m
  774
  820
  869
  919
  972
  1,027
  1,084
  1,144
  1,207
  1,272
  1,341
  1,413
  1,487
  1,566
  1,649
  1,735
  1,825
  1,919
  2,019
  2,123
  2,232
  2,346
  2,466
  2,592
  2,724
  2,862
  3,007
  3,160
  3,319
  3,487
  3,663
Debt-to-equity ratio
  0.691
  0.710
  0.740
  0.760
  0.780
  0.800
  0.820
  0.830
  0.850
  0.860
  0.880
  0.890
  0.900
  0.920
  0.930
  0.940
  0.950
  0.960
  0.970
  0.970
  0.980
  0.990
  1.000
  1.000
  1.010
  1.020
  1.020
  1.030
  1.030
  1.040
  1.040
Adjusted equity ratio
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  26
  38
  49
  60
  72
  84
  97
  111
  125
  141
  157
  197
  215
  234
  254
  275
  298
  321
  346
  372
  400
  429
  460
  493
  527
  563
  602
  642
  685
  730
  777
Depreciation, amort., depletion, $m
  35
  49
  50
  51
  52
  53
  54
  56
  57
  58
  60
  29
  31
  32
  34
  36
  38
  40
  42
  44
  46
  48
  51
  53
  56
  59
  62
  65
  68
  72
  76
Funds from operations, $m
  40
  87
  99
  111
  124
  137
  152
  167
  182
  199
  217
  226
  246
  267
  288
  311
  335
  361
  388
  416
  446
  478
  511
  546
  583
  622
  664
  707
  753
  802
  853
Change in working capital, $m
  -27
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  14
  15
Cash from operations, $m
  67
  83
  94
  107
  119
  133
  147
  161
  177
  193
  211
  220
  239
  260
  281
  304
  327
  353
  379
  407
  437
  468
  501
  535
  572
  610
  651
  694
  739
  787
  838
Maintenance CAPEX, $m
  0
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -24
  -25
  -26
  -28
  -29
  -31
  -32
  -34
  -36
  -38
  -40
  -42
  -44
  -46
  -48
  -51
  -53
  -56
  -59
  -62
  -65
  -68
  -72
New CAPEX, $m
  -23
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -30
  -31
  -33
  -34
  -36
  -38
  -39
  -41
  -43
  -45
  -48
  -50
  -52
  -55
  -58
  -61
Cash from investing activities, $m
  -33
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -46
  -48
  -50
  -53
  -55
  -58
  -60
  -64
  -67
  -71
  -74
  -78
  -82
  -85
  -89
  -94
  -98
  -104
  -109
  -114
  -120
  -126
  -133
Free cash flow, $m
  34
  51
  61
  71
  82
  94
  106
  118
  132
  146
  161
  168
  185
  202
  221
  240
  261
  282
  305
  330
  355
  382
  411
  441
  473
  507
  542
  580
  619
  661
  705
Issuance/(repayment) of debt, $m
  2
  24
  26
  27
  28
  29
  31
  32
  33
  35
  36
  38
  40
  42
  44
  46
  48
  50
  53
  55
  58
  61
  64
  67
  70
  74
  77
  81
  85
  89
  94
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  1
  24
  26
  27
  28
  29
  31
  32
  33
  35
  36
  38
  40
  42
  44
  46
  48
  50
  53
  55
  58
  61
  64
  67
  70
  74
  77
  81
  85
  89
  94
Total cash flow (excl. dividends), $m
  35
  76
  87
  98
  110
  123
  136
  150
  165
  181
  197
  206
  224
  244
  264
  286
  309
  333
  358
  385
  413
  443
  475
  508
  543
  580
  619
  661
  704
  750
  799
Retained Cash Flow (-), $m
  -61
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -31
  -32
  -34
  -35
  -37
  -39
  -40
  -42
  -44
  -46
  -49
  -51
  -53
  -56
  -59
  -62
  -65
  -68
  -71
  -75
  -78
  -82
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  54
  64
  74
  86
  97
  109
  122
  136
  150
  165
  172
  189
  207
  226
  246
  266
  288
  312
  336
  362
  390
  419
  449
  481
  515
  551
  589
  629
  672
  716
Discount rate, %
 
  6.10
  6.41
  6.73
  7.06
  7.41
  7.79
  8.17
  8.58
  9.01
  9.46
  9.94
  10.43
  10.95
  11.50
  12.08
  12.68
  13.32
  13.98
  14.68
  15.41
  16.19
  16.99
  17.84
  18.74
  19.67
  20.66
  21.69
  22.77
  23.91
  25.11
PV of cash for distribution, $m
 
  51
  57
  61
  65
  68
  70
  71
  70
  69
  67
  61
  58
  54
  49
  44
  39
  34
  30
  25
  21
  17
  13
  10
  8
  6
  4
  3
  2
  1
  1
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Morneau Shepell Inc. operates as a human resources consulting and technology company in Canada, the United States, and internationally. The company offers health and productivity, administrative, and retirement solutions to assist employers in managing the financial security, health, and productivity of their employees. Its retirement and pension solutions include actuarial, compensation consulting, defined contribution consulting, employee communication, international pension regulatory, investment consulting, legal consulting, compliance and governance support, pension design and regulatory, retirement planning, and total pension outsourcing services. The company also offers administrative solutions, such as defined benefit and contribution pension administration, employee self-service, health and benefits administration, human resources contact centers, and pension and benefits software. In addition, it provides childrenÂ’s support solutions, employee and family assistance programs, fitness coaching, targeted health programs, health index, traumatic event support, workersÂ’ compensation services, workplace learning, workplace mental health, and human resources support solutions, as well as absence management solutions comprising attendance, disability, workplace incident, injury, and illness management. Further, the company develops and implements customized investment strategies for pension funds, high-net-worth individuals, endowments, etc. It serves small businesses, and corporations and associations. The company was formerly known as Morneau Sobeco Income Fund and changed its name to Morneau Shepell Inc. in January 2011. Morneau Shepell Inc. was founded in 1962 and is headquartered in Toronto, Canada.

FINANCIAL RATIOS  of  Morneau Shepell Inc. (MSI)

Valuation Ratios
P/E Ratio 41.4
Price to Sales 1.8
Price to Book 3
Price to Tangible Book
Price to Cash Flow 16
Price to Free Cash Flow 24.4
Growth Rates
Sales Growth Rate 4.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -11.5%
Cap. Spend. - 3 Yr. Gr. Rate 0.9%
Financial Strength
Quick Ratio 0
Current Ratio 0.2
LT Debt to Equity 68.2%
Total Debt to Equity 69.1%
Interest Coverage 0
Management Effectiveness
Return On Assets 3.4%
Ret/ On Assets - 3 Yr. Avg. 3%
Return On Total Capital 4.2%
Ret/ On T. Cap. - 3 Yr. Avg. 3.7%
Return On Equity 7.8%
Return On Equity - 3 Yr. Avg. 6.9%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 12.3%
EBITDA Margin - 3 Yr. Avg. 11.9%
Operating Margin 9%
Oper. Margin - 3 Yr. Avg. 8.5%
Pre-Tax Margin 6.4%
Pre-Tax Margin - 3 Yr. Avg. 5.9%
Net Profit Margin 4.4%
Net Profit Margin - 3 Yr. Avg. 4%
Effective Tax Rate 31.6%
Eff/ Tax Rate - 3 Yr. Avg. 32.4%
Payout Ratio 153.8%

MSI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MSI stock intrinsic value calculation we used $592 million for the last fiscal year's total revenue generated by Morneau Shepell Inc.. The default revenue input number comes from 2016 income statement of Morneau Shepell Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MSI stock valuation model: a) initial revenue growth rate of 6% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 6.1%, whose default value for MSI is calculated based on our internal credit rating of Morneau Shepell Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Morneau Shepell Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MSI stock the variable cost ratio is equal to 43.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $286 million in the base year in the intrinsic value calculation for MSI stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Morneau Shepell Inc..

Corporate tax rate of 27% is the nominal tax rate for Morneau Shepell Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MSI stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MSI are equal to 45%.

Life of production assets of 16.7 years is the average useful life of capital assets used in Morneau Shepell Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MSI is equal to 11.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $362 million for Morneau Shepell Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 53.654 million for Morneau Shepell Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Morneau Shepell Inc. at the current share price and the inputted number of shares is $1.1 billion.

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Stock chart of MSI Financial statements of MSI
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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