Intrinsic value of Heidrick&Struggles International - HSII

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$22.00

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$22.00

 
Intrinsic value

$73.58

 
Up/down potential

+234%

 
Rating

str. buy

 
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 HSII 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 0.4

 

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, %
  9.67
  10.70
  10.13
  9.62
  9.16
  8.74
  8.37
  8.03
  7.73
  7.45
  7.21
  6.99
  6.79
  6.61
  6.45
  6.30
  6.17
  6.06
  5.95
  5.86
  5.77
  5.69
  5.62
  5.56
  5.51
  5.45
  5.41
  5.37
  5.33
  5.30
  5.27
Revenue, $m
  601
  665
  733
  803
  877
  953
  1,033
  1,116
  1,202
  1,292
  1,385
  1,482
  1,582
  1,687
  1,796
  1,909
  2,027
  2,150
  2,277
  2,411
  2,550
  2,695
  2,847
  3,005
  3,170
  3,343
  3,524
  3,713
  3,911
  4,119
  4,336
Variable operating expenses, $m
 
  622
  684
  748
  815
  885
  958
  1,034
  1,113
  1,194
  1,279
  1,352
  1,444
  1,540
  1,639
  1,742
  1,850
  1,962
  2,079
  2,200
  2,327
  2,460
  2,598
  2,743
  2,894
  3,051
  3,217
  3,389
  3,570
  3,759
  3,957
Fixed operating expenses, $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
Total operating expenses, $m
  566
  622
  684
  748
  815
  885
  958
  1,034
  1,113
  1,194
  1,279
  1,352
  1,444
  1,540
  1,639
  1,742
  1,850
  1,962
  2,079
  2,200
  2,327
  2,460
  2,598
  2,743
  2,894
  3,051
  3,217
  3,389
  3,570
  3,759
  3,957
Operating income, $m
  35
  43
  49
  55
  61
  68
  75
  82
  90
  98
  106
  129
  138
  147
  157
  167
  177
  188
  199
  210
  223
  235
  248
  262
  277
  292
  308
  324
  341
  360
  378
EBITDA, $m
  51
  63
  69
  76
  83
  90
  98
  106
  114
  122
  131
  140
  150
  160
  170
  181
  192
  204
  216
  228
  242
  255
  270
  285
  300
  317
  334
  352
  371
  390
  411
Interest expense (income), $m
  0
  0
  1
  2
  4
  5
  7
  8
  10
  11
  13
  15
  17
  18
  20
  22
  25
  27
  29
  32
  34
  37
  39
  42
  45
  48
  52
  55
  59
  62
  66
Earnings before tax, $m
  38
  43
  48
  52
  58
  63
  68
  74
  80
  86
  93
  115
  122
  129
  136
  144
  152
  161
  170
  179
  189
  199
  209
  220
  231
  243
  256
  269
  283
  297
  312
Tax expense, $m
  23
  12
  13
  14
  16
  17
  18
  20
  22
  23
  25
  31
  33
  35
  37
  39
  41
  43
  46
  48
  51
  54
  56
  59
  63
  66
  69
  73
  76
  80
  84
Net income, $m
  15
  31
  35
  38
  42
  46
  50
  54
  58
  63
  68
  84
  89
  94
  100
  105
  111
  117
  124
  131
  138
  145
  153
  161
  169
  178
  187
  196
  206
  217
  228

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  165
  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
  582
  462
  508
  557
  608
  662
  717
  774
  834
  897
  961
  1,028
  1,098
  1,171
  1,246
  1,325
  1,407
  1,492
  1,580
  1,673
  1,770
  1,870
  1,975
  2,085
  2,200
  2,320
  2,446
  2,577
  2,714
  2,858
  3,009
Adjusted assets (=assets-cash), $m
  417
  462
  508
  557
  608
  662
  717
  774
  834
  897
  961
  1,028
  1,098
  1,171
  1,246
  1,325
  1,407
  1,492
  1,580
  1,673
  1,770
  1,870
  1,975
  2,085
  2,200
  2,320
  2,446
  2,577
  2,714
  2,858
  3,009
Revenue / Adjusted assets
  1.441
  1.439
  1.443
  1.442
  1.442
  1.440
  1.441
  1.442
  1.441
  1.440
  1.441
  1.442
  1.441
  1.441
  1.441
  1.441
  1.441
  1.441
  1.441
  1.441
  1.441
  1.441
  1.442
  1.441
  1.441
  1.441
  1.441
  1.441
  1.441
  1.441
  1.441
Average production assets, $m
  56
  61
  67
  74
  81
  88
  95
  103
  111
  119
  127
  136
  146
  155
  165
  176
  186
  198
  210
  222
  235
  248
  262
  276
  292
  308
  324
  342
  360
  379
  399
Working capital, $m
  77
  -97
  -107
  -117
  -128
  -139
  -151
  -163
  -176
  -189
  -202
  -216
  -231
  -246
  -262
  -279
  -296
  -314
  -333
  -352
  -372
  -393
  -416
  -439
  -463
  -488
  -515
  -542
  -571
  -601
  -633
Total debt, $m
  0
  35
  71
  109
  149
  190
  233
  277
  324
  372
  422
  474
  528
  584
  643
  704
  767
  833
  902
  974
  1,048
  1,126
  1,208
  1,293
  1,382
  1,475
  1,572
  1,674
  1,781
  1,892
  2,009
Total liabilities, $m
  323
  358
  394
  432
  472
  513
  556
  600
  647
  695
  745
  797
  851
  907
  966
  1,027
  1,090
  1,156
  1,225
  1,297
  1,371
  1,449
  1,531
  1,616
  1,705
  1,798
  1,895
  1,997
  2,104
  2,215
  2,332
Total equity, $m
  259
  104
  114
  125
  137
  149
  161
  174
  188
  202
  216
  231
  247
  263
  280
  298
  316
  336
  356
  376
  398
  421
  444
  469
  495
  522
  550
  580
  611
  643
  677
Total liabilities and equity, $m
  582
  462
  508
  557
  609
  662
  717
  774
  835
  897
  961
  1,028
  1,098
  1,170
  1,246
  1,325
  1,406
  1,492
  1,581
  1,673
  1,769
  1,870
  1,975
  2,085
  2,200
  2,320
  2,445
  2,577
  2,715
  2,858
  3,009
Debt-to-equity ratio
  0.000
  0.340
  0.620
  0.870
  1.080
  1.270
  1.440
  1.590
  1.720
  1.840
  1.950
  2.050
  2.140
  2.220
  2.290
  2.360
  2.420
  2.480
  2.540
  2.590
  2.630
  2.680
  2.720
  2.760
  2.790
  2.830
  2.860
  2.890
  2.920
  2.940
  2.970
Adjusted equity ratio
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  15
  31
  35
  38
  42
  46
  50
  54
  58
  63
  68
  84
  89
  94
  100
  105
  111
  117
  124
  131
  138
  145
  153
  161
  169
  178
  187
  196
  206
  217
  228
Depreciation, amort., depletion, $m
  16
  20
  21
  21
  22
  22
  23
  24
  24
  25
  26
  11
  12
  13
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  24
  25
  26
  28
  29
  31
  32
Funds from operations, $m
  9
  51
  55
  59
  64
  68
  73
  78
  83
  88
  93
  95
  101
  107
  113
  119
  126
  133
  141
  149
  157
  165
  174
  183
  193
  203
  213
  224
  236
  248
  260
Change in working capital, $m
  -16
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -28
  -29
  -30
  -32
Cash from operations, $m
  25
  61
  65
  70
  74
  79
  84
  90
  95
  101
  107
  109
  115
  122
  129
  136
  144
  151
  160
  168
  177
  186
  196
  206
  217
  228
  240
  252
  265
  278
  292
Maintenance CAPEX, $m
  0
  -5
  -5
  -5
  -6
  -7
  -7
  -8
  -8
  -9
  -10
  -10
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -24
  -25
  -26
  -28
  -29
  -31
New CAPEX, $m
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
Cash from investing activities, $m
  -28
  -11
  -11
  -11
  -13
  -14
  -14
  -16
  -16
  -17
  -19
  -19
  -20
  -22
  -23
  -23
  -25
  -26
  -28
  -29
  -31
  -32
  -34
  -36
  -37
  -40
  -42
  -43
  -46
  -48
  -51
Free cash flow, $m
  -3
  51
  54
  58
  62
  66
  70
  74
  79
  84
  89
  90
  95
  100
  106
  112
  118
  125
  132
  139
  146
  154
  162
  170
  179
  188
  198
  208
  219
  230
  241
Issuance/(repayment) of debt, $m
  0
  35
  36
  38
  40
  41
  43
  45
  46
  48
  50
  52
  54
  56
  59
  61
  63
  66
  69
  72
  75
  78
  82
  85
  89
  93
  97
  102
  106
  111
  117
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  
  -10
  35
  36
  38
  40
  41
  43
  45
  46
  48
  50
  52
  54
  56
  59
  61
  63
  66
  69
  72
  75
  78
  82
  85
  89
  93
  97
  102
  106
  111
  117
Total cash flow (excl. dividends), $m
  -15
  86
  90
  96
  101
  107
  113
  119
  125
  132
  139
  142
  149
  157
  165
  173
  182
  191
  200
  210
  221
  232
  243
  255
  268
  281
  295
  310
  325
  341
  358
Retained Cash Flow (-), $m
  -4
  -10
  -11
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -30
  -31
  -32
  -34
Prev. year cash balance distribution, $m
 
  165
  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
 
  241
  80
  85
  90
  95
  100
  106
  112
  118
  124
  127
  133
  140
  148
  155
  163
  172
  181
  190
  199
  209
  220
  231
  242
  254
  267
  280
  294
  309
  324
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  231
  73
  74
  74
  74
  73
  72
  70
  68
  65
  60
  57
  53
  50
  46
  42
  37
  33
  29
  25
  22
  18
  15
  12
  10
  8
  6
  5
  3
  2
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

Heidrick & Struggles International, Inc. provides executive search, culture shaping, and leadership consulting services on a retained basis to businesses and business leaders worldwide. The company enables its clients to build leadership teams by facilitating the recruitment, management, and deployment of senior executives. Its leadership consulting services include leadership assessment; leadership, team, and board development; succession planning; talent strategy; people performance; inter-team collaboration; and organizational transformation. The company was founded in 1953 and is headquartered in Chicago, Illinois.

FINANCIAL RATIOS  of  Heidrick&Struggles International (HSII)

Valuation Ratios
P/E Ratio 27.3
Price to Sales 0.7
Price to Book 1.6
Price to Tangible Book
Price to Cash Flow 16.4
Price to Free Cash Flow 20.4
Growth Rates
Sales Growth Rate 9.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -68.8%
Cap. Spend. - 3 Yr. Gr. Rate 4.6%
Financial Strength
Quick Ratio NaN
Current Ratio 0.1
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 2.6%
Ret/ On Assets - 3 Yr. Avg. 2.3%
Return On Total Capital 5.8%
Ret/ On T. Cap. - 3 Yr. Avg. 4.9%
Return On Equity 5.8%
Return On Equity - 3 Yr. Avg. 5.2%
Asset Turnover 1
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 9%
EBITDA Margin - 3 Yr. Avg. 8.4%
Operating Margin 5.8%
Oper. Margin - 3 Yr. Avg. 5.7%
Pre-Tax Margin 6.3%
Pre-Tax Margin - 3 Yr. Avg. 5.6%
Net Profit Margin 2.5%
Net Profit Margin - 3 Yr. Avg. 2.3%
Effective Tax Rate 60.5%
Eff/ Tax Rate - 3 Yr. Avg. 59.4%
Payout Ratio 66.7%

HSII stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the HSII stock intrinsic value calculation we used $601 million for the last fiscal year's total revenue generated by Heidrick&Struggles International. The default revenue input number comes from 2016 income statement of Heidrick&Struggles International. 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 HSII stock valuation model: a) initial revenue growth rate of 10.7% 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 4.3%, whose default value for HSII is calculated based on our internal credit rating of Heidrick&Struggles International, 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 Heidrick&Struggles International.
    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 HSII stock the variable cost ratio is equal to 93.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for HSII 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 Heidrick&Struggles International.

Corporate tax rate of 27% is the nominal tax rate for Heidrick&Struggles International. 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 HSII 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 HSII are equal to 9.2%.

Life of production assets of 12.3 years is the average useful life of capital assets used in Heidrick&Struggles International 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 HSII is equal to -14.6%. 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 - $259 million for Heidrick&Struggles International - 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 19.18 million for Heidrick&Struggles International 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 Heidrick&Struggles International at the current share price and the inputted number of shares is $0.4 billion.


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Stock chart of HSII Financial statements of HSII Annual reports of HSII
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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