Intrinsic value of Morneau Shepell Inc. - MSI

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$20.15

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$20.15

 
Intrinsic value

$11.60

 
Up/down potential

-42%

 
Rating

sell

 
Value-price divergence* premium content

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*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
  2.10
  2.39
  2.65
  2.89
  3.10
  3.29
  3.46
  3.61
  3.75
  3.88
  3.99
  4.09
  4.18
  4.26
  4.34
  4.40
  4.46
  4.52
  4.56
  4.61
  4.65
  4.68
  4.71
  4.74
  4.77
  4.79
  4.81
  4.83
  4.85
  4.86
Revenue, $m
  592
  604
  619
  635
  654
  674
  696
  720
  746
  774
  804
  836
  870
  907
  945
  986
  1,030
  1,076
  1,124
  1,176
  1,230
  1,287
  1,347
  1,411
  1,478
  1,548
  1,622
  1,701
  1,783
  1,869
  1,960
Variable operating expenses, $m
 
  265
  270
  277
  284
  291
  300
  309
  319
  330
  342
  322
  335
  349
  364
  380
  396
  414
  433
  452
  473
  495
  518
  543
  569
  596
  624
  654
  686
  719
  754
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
  558
  570
  585
  600
  615
  632
  649
  667
  687
  708
  697
  720
  743
  768
  794
  821
  849
  879
  909
  942
  975
  1,010
  1,048
  1,086
  1,126
  1,167
  1,211
  1,257
  1,304
  1,354
Operating income, $m
  53
  47
  48
  51
  54
  59
  64
  71
  78
  87
  97
  139
  151
  164
  178
  193
  209
  227
  246
  266
  288
  311
  337
  363
  392
  422
  455
  489
  526
  565
  606
EBITDA, $m
  88
  95
  97
  100
  104
  109
  115
  122
  131
  140
  150
  162
  174
  188
  203
  219
  237
  256
  276
  298
  321
  346
  373
  401
  432
  464
  498
  535
  574
  615
  659
Interest expense (income), $m
  0
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  15
  16
  16
  17
  18
  19
  21
  22
  23
  24
  26
  27
  29
  30
  32
  34
  36
  38
  40
Earnings before tax, $m
  38
  38
  39
  41
  45
  49
  54
  60
  67
  74
  83
  125
  136
  148
  161
  175
  191
  207
  225
  244
  265
  287
  311
  336
  363
  392
  423
  455
  490
  527
  566
Tax expense, $m
  12
  10
  11
  11
  12
  13
  14
  16
  18
  20
  22
  34
  37
  40
  44
  47
  51
  56
  61
  66
  72
  78
  84
  91
  98
  106
  114
  123
  132
  142
  153
Net income, $m
  26
  28
  29
  30
  33
  36
  39
  44
  49
  54
  61
  91
  99
  108
  118
  128
  139
  151
  164
  178
  194
  210
  227
  245
  265
  286
  309
  332
  358
  385
  413

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
  790
  809
  830
  854
  881
  910
  941
  975
  1,012
  1,051
  1,093
  1,138
  1,185
  1,236
  1,289
  1,346
  1,406
  1,470
  1,537
  1,608
  1,682
  1,761
  1,844
  1,932
  2,024
  2,121
  2,223
  2,330
  2,443
  2,562
Adjusted assets (=assets-cash), $m
  774
  790
  809
  830
  854
  881
  910
  941
  975
  1,012
  1,051
  1,093
  1,138
  1,185
  1,236
  1,289
  1,346
  1,406
  1,470
  1,537
  1,608
  1,682
  1,761
  1,844
  1,932
  2,024
  2,121
  2,223
  2,330
  2,443
  2,562
Revenue / Adjusted assets
  0.765
  0.765
  0.765
  0.765
  0.766
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  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
Average production assets, $m
  267
  272
  278
  286
  294
  303
  313
  324
  336
  348
  362
  376
  392
  408
  425
  444
  463
  484
  506
  529
  553
  579
  606
  635
  665
  697
  730
  765
  802
  841
  882
Working capital, $m
  64
  68
  70
  72
  74
  76
  79
  81
  84
  87
  91
  94
  98
  102
  107
  111
  116
  122
  127
  133
  139
  145
  152
  159
  167
  175
  183
  192
  201
  211
  221
Total debt, $m
  250
  258
  268
  280
  293
  307
  322
  339
  357
  376
  397
  420
  443
  469
  495
  524
  554
  586
  620
  656
  693
  733
  775
  819
  866
  915
  966
  1,021
  1,078
  1,138
  1,201
Total liabilities, $m
  412
  420
  430
  442
  455
  469
  484
  501
  519
  538
  559
  582
  605
  631
  657
  686
  716
  748
  782
  818
  855
  895
  937
  981
  1,028
  1,077
  1,128
  1,183
  1,240
  1,300
  1,363
Total equity, $m
  362
  370
  379
  389
  400
  412
  426
  441
  456
  474
  492
  512
  532
  555
  578
  603
  630
  658
  688
  719
  752
  787
  824
  863
  904
  947
  993
  1,040
  1,091
  1,143
  1,199
Total liabilities and equity, $m
  774
  790
  809
  831
  855
  881
  910
  942
  975
  1,012
  1,051
  1,094
  1,137
  1,186
  1,235
  1,289
  1,346
  1,406
  1,470
  1,537
  1,607
  1,682
  1,761
  1,844
  1,932
  2,024
  2,121
  2,223
  2,331
  2,443
  2,562
Debt-to-equity ratio
  0.691
  0.700
  0.710
  0.720
  0.730
  0.740
  0.760
  0.770
  0.780
  0.790
  0.810
  0.820
  0.830
  0.840
  0.860
  0.870
  0.880
  0.890
  0.900
  0.910
  0.920
  0.930
  0.940
  0.950
  0.960
  0.970
  0.970
  0.980
  0.990
  1.000
  1.000
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
  28
  29
  30
  33
  36
  39
  44
  49
  54
  61
  91
  99
  108
  118
  128
  139
  151
  164
  178
  194
  210
  227
  245
  265
  286
  309
  332
  358
  385
  413
Depreciation, amort., depletion, $m
  35
  48
  49
  49
  50
  50
  51
  52
  52
  53
  54
  23
  23
  24
  25
  27
  28
  29
  30
  32
  33
  35
  36
  38
  40
  42
  44
  46
  48
  50
  53
Funds from operations, $m
  40
  76
  77
  79
  82
  86
  90
  95
  101
  107
  115
  114
  123
  133
  143
  155
  167
  180
  195
  210
  227
  244
  263
  283
  305
  328
  352
  378
  406
  435
  466
Change in working capital, $m
  -27
  1
  2
  2
  2
  2
  3
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  7
  8
  8
  8
  9
  9
  10
  10
Cash from operations, $m
  67
  73
  76
  78
  80
  83
  88
  92
  98
  104
  111
  110
  119
  128
  139
  150
  162
  175
  189
  204
  221
  238
  256
  276
  297
  320
  344
  369
  396
  425
  456
Maintenance CAPEX, $m
  0
  -16
  -16
  -17
  -17
  -18
  -18
  -19
  -19
  -20
  -21
  -22
  -23
  -23
  -24
  -25
  -27
  -28
  -29
  -30
  -32
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -46
  -48
  -50
New CAPEX, $m
  -23
  -5
  -7
  -7
  -8
  -9
  -10
  -11
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -18
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -29
  -30
  -32
  -33
  -35
  -37
  -39
  -41
Cash from investing activities, $m
  -33
  -21
  -23
  -24
  -25
  -27
  -28
  -30
  -31
  -33
  -35
  -36
  -38
  -39
  -41
  -43
  -47
  -49
  -51
  -53
  -56
  -59
  -62
  -65
  -68
  -72
  -75
  -79
  -83
  -87
  -91
Free cash flow, $m
  34
  52
  53
  53
  55
  57
  59
  63
  67
  71
  77
  74
  81
  89
  97
  106
  116
  127
  138
  151
  164
  179
  195
  211
  229
  248
  269
  291
  314
  338
  365
Issuance/(repayment) of debt, $m
  2
  8
  10
  11
  13
  14
  15
  17
  18
  19
  21
  22
  24
  25
  27
  29
  30
  32
  34
  36
  38
  40
  42
  44
  47
  49
  52
  54
  57
  60
  63
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
  8
  10
  11
  13
  14
  15
  17
  18
  19
  21
  22
  24
  25
  27
  29
  30
  32
  34
  36
  38
  40
  42
  44
  47
  49
  52
  54
  57
  60
  63
Total cash flow (excl. dividends), $m
  35
  60
  63
  65
  68
  71
  75
  80
  85
  91
  98
  97
  105
  114
  124
  135
  146
  159
  172
  187
  202
  219
  237
  256
  276
  297
  320
  345
  371
  398
  428
Retained Cash Flow (-), $m
  -61
  -8
  -9
  -10
  -11
  -12
  -14
  -15
  -16
  -17
  -18
  -20
  -21
  -22
  -24
  -25
  -27
  -28
  -30
  -31
  -33
  -35
  -37
  -39
  -41
  -43
  -45
  -48
  -50
  -53
  -56
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
 
  52
  54
  55
  56
  58
  61
  65
  69
  74
  79
  77
  84
  92
  100
  109
  120
  131
  142
  155
  169
  184
  200
  217
  235
  254
  275
  297
  321
  346
  372
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
 
  49
  48
  45
  43
  41
  39
  37
  36
  34
  32
  27
  26
  24
  22
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  18
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  14
  11
  10
  8
  6
  5
  4
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  2
  1
  1
  1
  0
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 41.3
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 2.1% 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 53.651 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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