Intrinsic value of Resources Connection - RECN

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$14.40

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$14.40

 
Intrinsic value

$28.91

 
Up/down potential

+101%

 
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 RECN 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, %
  1.35
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  599
  611
  625
  641
  659
  679
  701
  725
  751
  779
  808
  840
  875
  911
  949
  990
  1,034
  1,080
  1,128
  1,180
  1,234
  1,291
  1,351
  1,415
  1,482
  1,553
  1,627
  1,705
  1,787
  1,874
  1,965
Variable operating expenses, $m
 
  381
  389
  399
  410
  421
  435
  449
  464
  481
  499
  500
  521
  542
  565
  590
  616
  643
  672
  702
  735
  769
  805
  843
  882
  924
  969
  1,015
  1,064
  1,116
  1,170
Fixed operating expenses, $m
 
  179
  184
  188
  193
  198
  203
  208
  213
  219
  224
  230
  235
  241
  247
  253
  260
  266
  273
  280
  287
  294
  301
  309
  317
  324
  333
  341
  349
  358
  367
Total operating expenses, $m
  545
  560
  573
  587
  603
  619
  638
  657
  677
  700
  723
  730
  756
  783
  812
  843
  876
  909
  945
  982
  1,022
  1,063
  1,106
  1,152
  1,199
  1,248
  1,302
  1,356
  1,413
  1,474
  1,537
Operating income, $m
  54
  51
  52
  54
  56
  60
  64
  68
  73
  79
  86
  110
  118
  127
  137
  147
  158
  171
  184
  197
  212
  228
  245
  264
  283
  304
  326
  349
  374
  400
  428
EBITDA, $m
  58
  68
  69
  71
  74
  77
  81
  86
  91
  97
  104
  111
  119
  128
  137
  148
  159
  171
  184
  198
  213
  229
  246
  264
  284
  305
  327
  350
  375
  401
  429
Interest expense (income), $m
  0
  0
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  6
Earnings before tax, $m
  54
  51
  52
  54
  56
  59
  63
  68
  73
  79
  85
  109
  117
  126
  135
  146
  157
  169
  181
  195
  210
  226
  242
  260
  279
  300
  321
  344
  369
  395
  422
Tax expense, $m
  24
  14
  14
  14
  15
  16
  17
  18
  20
  21
  23
  30
  32
  34
  37
  39
  42
  46
  49
  53
  57
  61
  65
  70
  75
  81
  87
  93
  100
  107
  114
Net income, $m
  30
  37
  38
  39
  41
  43
  46
  49
  53
  57
  62
  80
  86
  92
  99
  106
  114
  123
  132
  142
  153
  165
  177
  190
  204
  219
  235
  251
  269
  288
  308

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  116
  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
  417
  307
  314
  322
  331
  341
  352
  364
  377
  391
  406
  422
  439
  458
  477
  498
  520
  543
  567
  593
  620
  649
  679
  711
  745
  780
  817
  857
  898
  942
  987
Adjusted assets (=assets-cash), $m
  301
  307
  314
  322
  331
  341
  352
  364
  377
  391
  406
  422
  439
  458
  477
  498
  520
  543
  567
  593
  620
  649
  679
  711
  745
  780
  817
  857
  898
  942
  987
Revenue / Adjusted assets
  1.990
  1.990
  1.990
  1.991
  1.991
  1.991
  1.991
  1.992
  1.992
  1.992
  1.990
  1.991
  1.993
  1.989
  1.990
  1.988
  1.988
  1.989
  1.989
  1.990
  1.990
  1.989
  1.990
  1.990
  1.989
  1.991
  1.991
  1.989
  1.990
  1.989
  1.991
Average production assets, $m
  11
  11
  11
  12
  12
  12
  13
  13
  14
  14
  15
  15
  16
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
  27
  28
  29
  31
  32
  34
  35
Working capital, $m
  148
  32
  33
  34
  35
  36
  37
  38
  40
  41
  43
  45
  46
  48
  50
  52
  55
  57
  60
  63
  65
  68
  72
  75
  79
  82
  86
  90
  95
  99
  104
Total debt, $m
  0
  2
  3
  5
  7
  10
  13
  16
  19
  22
  26
  30
  34
  39
  43
  48
  54
  59
  65
  72
  79
  86
  93
  101
  109
  118
  127
  137
  147
  158
  169
Total liabilities, $m
  75
  76
  77
  79
  81
  84
  87
  90
  93
  96
  100
  104
  108
  113
  117
  122
  128
  133
  139
  146
  153
  160
  167
  175
  183
  192
  201
  211
  221
  232
  243
Total equity, $m
  343
  231
  237
  243
  250
  257
  266
  275
  284
  295
  306
  318
  331
  345
  360
  375
  392
  409
  428
  447
  468
  489
  512
  536
  562
  588
  616
  646
  677
  710
  744
Total liabilities and equity, $m
  418
  307
  314
  322
  331
  341
  353
  365
  377
  391
  406
  422
  439
  458
  477
  497
  520
  542
  567
  593
  621
  649
  679
  711
  745
  780
  817
  857
  898
  942
  987
Debt-to-equity ratio
  0.000
  0.010
  0.010
  0.020
  0.030
  0.040
  0.050
  0.060
  0.070
  0.080
  0.080
  0.090
  0.100
  0.110
  0.120
  0.130
  0.140
  0.150
  0.150
  0.160
  0.170
  0.170
  0.180
  0.190
  0.190
  0.200
  0.210
  0.210
  0.220
  0.220
  0.230
Adjusted equity ratio
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754
  0.754

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  30
  37
  38
  39
  41
  43
  46
  49
  53
  57
  62
  80
  86
  92
  99
  106
  114
  123
  132
  142
  153
  165
  177
  190
  204
  219
  235
  251
  269
  288
  308
Depreciation, amort., depletion, $m
  4
  17
  17
  17
  17
  18
  18
  18
  18
  18
  18
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
Funds from operations, $m
  34
  54
  55
  57
  59
  61
  64
  67
  71
  75
  80
  80
  86
  93
  99
  107
  115
  124
  133
  143
  154
  165
  178
  191
  205
  220
  236
  252
  270
  289
  309
Change in working capital, $m
  -4
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  5
  5
Cash from operations, $m
  38
  43
  55
  56
  58
  60
  63
  66
  69
  74
  78
  79
  84
  91
  97
  105
  113
  121
  131
  140
  151
  162
  175
  188
  201
  216
  232
  248
  266
  285
  305
Maintenance CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
New CAPEX, $m
  -2
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
Cash from investing activities, $m
  -2
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
Free cash flow, $m
  36
  42
  54
  55
  57
  59
  62
  65
  68
  73
  77
  78
  83
  89
  96
  103
  111
  120
  129
  139
  149
  161
  173
  186
  199
  214
  229
  246
  263
  282
  302
Issuance/(repayment) of debt, $m
  0
  2
  2
  2
  2
  2
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
Issuance/(repurchase) of shares, $m
  -18
  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  
  -18
  2
  2
  2
  2
  2
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
Total cash flow (excl. dividends), $m
  18
  44
  56
  57
  59
  62
  64
  68
  72
  76
  81
  82
  88
  94
  101
  109
  117
  126
  135
  145
  156
  168
  180
  193
  208
  223
  239
  256
  274
  293
  313
Retained Cash Flow (-), $m
  -3
  -4
  -5
  -6
  -7
  -8
  -8
  -9
  -10
  -11
  -11
  -12
  -13
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -21
  -22
  -23
  -24
  -25
  -27
  -28
  -30
  -31
  -33
  -34
Prev. year cash balance distribution, $m
 
  116
  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
 
  156
  50
  51
  52
  54
  56
  59
  62
  65
  70
  70
  75
  80
  86
  93
  100
  108
  117
  126
  136
  146
  157
  169
  182
  196
  210
  226
  242
  260
  279
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
 
  149
  46
  44
  43
  42
  41
  40
  39
  38
  36
  33
  32
  30
  29
  27
  25
  24
  21
  19
  17
  15
  13
  11
  9
  8
  6
  5
  4
  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
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Resources Connection, Inc. provides consulting and business initiative support services in North America, Europe, and the Asia Pacific. The company offers finance and accounting services, including process transformation and improvement, financial reporting and analysis, technical and operational accounting, merger and acquisition due diligence, audit response, implementation of new accounting standards, and remediation support. It also provides information management services, such as strategy development, program and project management, business and technology integration, data strategy, and business performance management. In addition, the company offers corporate advisory, strategic communications, and restructuring services; and corporate governance, risk, and compliance management services, such as contract and regulatory compliance, enterprise risk management, internal controls management, and operation and information technology (IT) audits. Further, it provides supply chain management services comprising supply chain strategy development, procurement and supplier management, logistics and materials management, supply chain planning and forecasting, and unique device identification compliance; and human capital services, including change management, organization development and effectiveness, and optimization of human resources technology and operations. Additionally, the company offers legal and regulatory services with projects; secondments, or tactical needs, such as commercial transactions; compliance initiatives; law department operations; and business strategy and litigation support. It also provides policyIQ, a proprietary cloud-based governance, risk, and compliance software application. The company was formerly known as RC Transaction Corp. and changed its name to Resources Connection, Inc. in August 2000. Resources Connection, Inc. was founded in 1996 and is headquartered in Irvine, California.

FINANCIAL RATIOS  of  Resources Connection (RECN)

Valuation Ratios
P/E Ratio 17.4
Price to Sales 0.9
Price to Book 1.5
Price to Tangible Book
Price to Cash Flow 13.7
Price to Free Cash Flow 14.5
Growth Rates
Sales Growth Rate 1.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 0%
Cap. Spend. - 3 Yr. Gr. Rate -7.8%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 7.2%
Ret/ On Assets - 3 Yr. Avg. 6.2%
Return On Total Capital 8.8%
Ret/ On T. Cap. - 3 Yr. Avg. 7.6%
Return On Equity 8.8%
Return On Equity - 3 Yr. Avg. 7.6%
Asset Turnover 1.4
Profitability Ratios
Gross Margin 38.7%
Gross Margin - 3 Yr. Avg. 38.5%
EBITDA Margin 9.7%
EBITDA Margin - 3 Yr. Avg. 8.8%
Operating Margin 9%
Oper. Margin - 3 Yr. Avg. 8.1%
Pre-Tax Margin 9%
Pre-Tax Margin - 3 Yr. Avg. 8.1%
Net Profit Margin 5%
Net Profit Margin - 3 Yr. Avg. 4.4%
Effective Tax Rate 44.4%
Eff/ Tax Rate - 3 Yr. Avg. 45.3%
Payout Ratio 46.7%

RECN stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the RECN stock intrinsic value calculation we used $599 million for the last fiscal year's total revenue generated by Resources Connection. The default revenue input number comes from 2016 income statement of Resources Connection. 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 RECN stock valuation model: a) initial revenue growth rate of 2% 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 RECN is calculated based on our internal credit rating of Resources Connection, 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 Resources Connection.
    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 RECN stock the variable cost ratio is equal to 62.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $175 million in the base year in the intrinsic value calculation for RECN 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 Resources Connection.

Corporate tax rate of 27% is the nominal tax rate for Resources Connection. 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 RECN 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 RECN are equal to 1.8%.

Life of production assets of 45.5 years is the average useful life of capital assets used in Resources Connection 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 RECN is equal to 5.3%. 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 - $343 million for Resources Connection - 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 29.635 million for Resources Connection 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 Resources Connection at the current share price and the inputted number of shares is $0.4 billion.


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COMPANY NEWS

▶ Resources Connection misses Street 3Q forecasts   [Apr-05-17 04:12PM  Associated Press]
▶ RGP Hires Michael Carberry as Managing Director, Carolinas   [Nov-09-16 09:01AM  Business Wire]
▶ CFO Moves: Resources Connection   [06:56AM  at The Wall Street Journal]
Stock chart of RECN Financial statements of RECN
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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