Intrinsic value of Resources Connection - RECN

Previous Close

$15.70

  Intrinsic Value

$24.76

stock screener

  Rating & Target

str. buy

+58%

Previous close

$15.70

 
Intrinsic value

$24.76

 
Up/down potential

+58%

 
Rating

str. buy

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 2017), $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 0.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -2.67
  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
  583
  595
  608
  624
  642
  661
  682
  706
  731
  758
  787
  818
  851
  887
  924
  964
  1,006
  1,051
  1,098
  1,148
  1,201
  1,257
  1,315
  1,377
  1,442
  1,511
  1,583
  1,659
  1,740
  1,824
  1,912
Variable operating expenses, $m
 
  540
  552
  566
  581
  599
  617
  638
  660
  684
  709
  720
  749
  780
  813
  848
  885
  924
  966
  1,010
  1,056
  1,105
  1,157
  1,211
  1,269
  1,329
  1,393
  1,460
  1,530
  1,604
  1,682
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
  549
  540
  552
  566
  581
  599
  617
  638
  660
  684
  709
  720
  749
  780
  813
  848
  885
  924
  966
  1,010
  1,056
  1,105
  1,157
  1,211
  1,269
  1,329
  1,393
  1,460
  1,530
  1,604
  1,682
Operating income, $m
  34
  54
  56
  58
  60
  62
  65
  68
  71
  74
  78
  98
  102
  107
  111
  116
  121
  126
  132
  138
  145
  151
  158
  166
  174
  182
  191
  200
  209
  219
  230
EBITDA, $m
  37
  72
  74
  76
  78
  80
  83
  86
  89
  92
  96
  99
  104
  108
  112
  117
  122
  128
  134
  140
  146
  153
  160
  167
  175
  184
  193
  202
  212
  222
  233
Interest expense (income), $m
  1
  2
  2
  2
  2
  3
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  12
  13
  13
Earnings before tax, $m
  34
  52
  54
  56
  58
  60
  62
  65
  68
  71
  74
  95
  98
  102
  106
  111
  116
  121
  126
  131
  137
  144
  150
  157
  164
  172
  180
  189
  198
  207
  217
Tax expense, $m
  15
  14
  15
  15
  16
  16
  17
  18
  18
  19
  20
  26
  27
  28
  29
  30
  31
  33
  34
  35
  37
  39
  41
  42
  44
  46
  49
  51
  53
  56
  59
Net income, $m
  19
  38
  39
  41
  42
  44
  45
  47
  49
  52
  54
  69
  72
  75
  78
  81
  84
  88
  92
  96
  100
  105
  110
  115
  120
  126
  131
  138
  144
  151
  158

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  62
  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
  364
  308
  315
  323
  332
  342
  354
  366
  379
  393
  408
  424
  441
  459
  479
  499
  521
  545
  569
  595
  622
  651
  682
  714
  747
  783
  820
  860
  901
  945
  991
Adjusted assets (=assets-cash), $m
  302
  308
  315
  323
  332
  342
  354
  366
  379
  393
  408
  424
  441
  459
  479
  499
  521
  545
  569
  595
  622
  651
  682
  714
  747
  783
  820
  860
  901
  945
  991
Revenue / Adjusted assets
  1.930
  1.932
  1.930
  1.932
  1.934
  1.933
  1.927
  1.929
  1.929
  1.929
  1.929
  1.929
  1.930
  1.932
  1.929
  1.932
  1.931
  1.928
  1.930
  1.929
  1.931
  1.931
  1.928
  1.929
  1.930
  1.930
  1.930
  1.929
  1.931
  1.930
  1.929
Average production assets, $m
  22
  23
  23
  24
  24
  25
  26
  27
  28
  29
  30
  31
  32
  34
  35
  37
  38
  40
  42
  44
  46
  48
  50
  52
  55
  57
  60
  63
  66
  69
  73
Working capital, $m
  95
  34
  35
  36
  37
  38
  39
  40
  42
  43
  45
  47
  49
  51
  53
  55
  57
  60
  63
  65
  68
  72
  75
  79
  82
  86
  90
  95
  99
  104
  109
Total debt, $m
  48
  50
  53
  57
  61
  65
  69
  74
  80
  86
  92
  99
  106
  114
  122
  130
  139
  149
  159
  170
  181
  194
  206
  220
  234
  248
  264
  281
  298
  316
  335
Total liabilities, $m
  126
  128
  131
  135
  139
  143
  147
  152
  158
  164
  170
  177
  184
  192
  200
  208
  217
  227
  237
  248
  259
  272
  284
  298
  312
  326
  342
  359
  376
  394
  413
Total equity, $m
  238
  180
  184
  188
  194
  200
  206
  213
  221
  229
  238
  247
  257
  268
  279
  291
  304
  317
  332
  347
  363
  380
  397
  416
  436
  456
  478
  501
  525
  551
  578
Total liabilities and equity, $m
  364
  308
  315
  323
  333
  343
  353
  365
  379
  393
  408
  424
  441
  460
  479
  499
  521
  544
  569
  595
  622
  652
  681
  714
  748
  782
  820
  860
  901
  945
  991
Debt-to-equity ratio
  0.202
  0.280
  0.290
  0.300
  0.310
  0.320
  0.340
  0.350
  0.360
  0.370
  0.390
  0.400
  0.410
  0.420
  0.440
  0.450
  0.460
  0.470
  0.480
  0.490
  0.500
  0.510
  0.520
  0.530
  0.540
  0.540
  0.550
  0.560
  0.570
  0.570
  0.580
Adjusted equity ratio
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  19
  38
  39
  41
  42
  44
  45
  47
  49
  52
  54
  69
  72
  75
  78
  81
  84
  88
  92
  96
  100
  105
  110
  115
  120
  126
  131
  138
  144
  151
  158
Depreciation, amort., depletion, $m
  3
  18
  18
  18
  18
  18
  18
  18
  18
  18
  18
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
Funds from operations, $m
  23
  56
  57
  59
  60
  62
  63
  65
  67
  70
  72
  70
  73
  76
  79
  82
  86
  89
  93
  97
  102
  106
  111
  116
  122
  127
  133
  140
  146
  153
  161
Change in working capital, $m
  -5
  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
  5
Cash from operations, $m
  28
  55
  56
  58
  59
  61
  62
  64
  66
  68
  70
  68
  71
  74
  77
  80
  83
  87
  91
  95
  99
  103
  108
  113
  118
  124
  129
  135
  142
  149
  156
Maintenance CAPEX, $m
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
New CAPEX, $m
  -5
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
Cash from investing activities, $m
  20
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -5
Free cash flow, $m
  48
  54
  55
  56
  58
  59
  61
  62
  64
  66
  68
  66
  69
  71
  74
  77
  80
  84
  87
  91
  95
  100
  104
  109
  114
  119
  125
  131
  137
  143
  150
Issuance/(repayment) of debt, $m
  48
  2
  3
  3
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  16
  17
  18
  19
Issuance/(repurchase) of shares, $m
  -111
  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  
  -63
  2
  3
  3
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  16
  17
  18
  19
Total cash flow (excl. dividends), $m
  -15
  57
  58
  60
  61
  63
  65
  67
  70
  72
  75
  73
  76
  79
  82
  86
  90
  94
  98
  102
  107
  112
  117
  122
  128
  134
  140
  147
  154
  161
  169
Retained Cash Flow (-), $m
  105
  -4
  -4
  -5
  -5
  -6
  -6
  -7
  -8
  -8
  -9
  -9
  -10
  -11
  -11
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -27
Prev. year cash balance distribution, $m
 
  62
  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
 
  115
  54
  55
  56
  57
  59
  60
  62
  64
  66
  63
  66
  68
  71
  74
  77
  80
  83
  87
  91
  95
  99
  104
  108
  113
  118
  124
  130
  136
  142
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
 
  110
  49
  48
  46
  44
  43
  41
  39
  37
  35
  30
  28
  26
  24
  22
  20
  17
  15
  13
  12
  10
  8
  7
  6
  4
  3
  3
  2
  1
  1
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
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Resources Connection, Inc. is a multinational consulting firm. The Company's operating entities primarily provide services under the name Resources Global Professionals (RGP). The Company provides consulting and business initiative support services to its global client base in the areas of accounting; finance; corporate governance, risk and compliance (GRC) management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management, and legal and regulatory. The Company provides its services and solutions to a client base in a range of industries. Its finance and accounting services encompass accounting operations, financial reporting, internal controls, financial analyses and business transactions. It offers a range of technology solutions, which include enterprise resource planning systems; strategic front-of-the-house systems; human resources (HR) information systems, and supply chain management systems, among others.

FINANCIAL RATIOS  of  Resources Connection (RECN)

Valuation Ratios
P/E Ratio 24.5
Price to Sales 0.8
Price to Book 2
Price to Tangible Book
Price to Cash Flow 16.6
Price to Free Cash Flow 20.2
Growth Rates
Sales Growth Rate -2.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 150%
Cap. Spend. - 3 Yr. Gr. Rate 4.6%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 20.2%
Total Debt to Equity 20.2%
Interest Coverage 35
Management Effectiveness
Return On Assets 5%
Ret/ On Assets - 3 Yr. Avg. 6.3%
Return On Total Capital 6%
Ret/ On T. Cap. - 3 Yr. Avg. 7.7%
Return On Equity 6.5%
Return On Equity - 3 Yr. Avg. 7.8%
Asset Turnover 1.5
Profitability Ratios
Gross Margin 37.9%
Gross Margin - 3 Yr. Avg. 38.4%
EBITDA Margin 6.5%
EBITDA Margin - 3 Yr. Avg. 8.4%
Operating Margin 5.8%
Oper. Margin - 3 Yr. Avg. 7.8%
Pre-Tax Margin 5.8%
Pre-Tax Margin - 3 Yr. Avg. 7.8%
Net Profit Margin 3.3%
Net Profit Margin - 3 Yr. Avg. 4.3%
Effective Tax Rate 44.1%
Eff/ Tax Rate - 3 Yr. Avg. 44.2%
Payout Ratio 73.7%

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 $583 million for the last fiscal year's total revenue generated by Resources Connection. The default revenue input number comes from 2017 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 90.9%.

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 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 4.2% 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 3.8%.

Life of production assets of 64.3 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 5.7%. 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 - $238 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 30.128 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 $0.5 billion.

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COMPANY NEWS

▶ Resources Connection tops 1Q revenue forecasts   [Oct-04-17 04:14PM  Associated Press]
▶ Resources Connection misses 4Q profit forecasts   [Jul-20-17 09:43PM  Associated Press]
▶ 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]
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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