Intrinsic value of Resources Connection - RECN

Previous Close

$14.30

  Intrinsic Value

$17.92

stock screener

  Rating & Target

buy

+25%

Previous close

$14.30

 
Intrinsic value

$17.92

 
Up/down potential

+25%

 
Rating

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
   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, %
  2.00
  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
  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
  541
  553
  567
  582
  599
  618
  638
  661
  684
  710
  720
  750
  781
  814
  849
  886
  926
  967
  1,011
  1,058
  1,107
  1,158
  1,213
  1,270
  1,331
  1,394
  1,461
  1,532
  1,606
  1,684
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
  541
  553
  567
  582
  599
  618
  638
  661
  684
  710
  720
  750
  781
  814
  849
  886
  926
  967
  1,011
  1,058
  1,107
  1,158
  1,213
  1,270
  1,331
  1,394
  1,461
  1,532
  1,606
  1,684
Operating income, $m
  54
  55
  57
  59
  62
  64
  67
  70
  73
  77
  98
  102
  106
  110
  115
  120
  125
  131
  137
  143
  150
  157
  164
  172
  180
  189
  198
  208
  218
  228
EBITDA, $m
  91
  93
  95
  98
  101
  104
  108
  111
  116
  120
  125
  130
  135
  141
  147
  153
  160
  168
  175
  183
  192
  201
  210
  220
  230
  242
  253
  265
  278
  292
Interest expense (income), $m
  1
  3
  3
  3
  3
  3
  3
  4
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  12
  13
  13
  14
  15
  16
  17
Earnings before tax, $m
  51
  53
  54
  56
  59
  61
  63
  66
  69
  72
  93
  96
  100
  104
  108
  113
  118
  123
  128
  134
  140
  147
  153
  160
  168
  176
  184
  192
  202
  211
Tax expense, $m
  14
  14
  15
  15
  16
  16
  17
  18
  19
  19
  25
  26
  27
  28
  29
  31
  32
  33
  35
  36
  38
  40
  41
  43
  45
  47
  50
  52
  54
  57
Net income, $m
  37
  39
  40
  41
  43
  44
  46
  48
  50
  53
  68
  70
  73
  76
  79
  83
  86
  90
  94
  98
  102
  107
  112
  117
  122
  128
  134
  140
  147
  154

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
Total assets, $m
  371
  380
  389
  400
  413
  426
  440
  456
  473
  491
  511
  531
  553
  577
  602
  628
  656
  686
  717
  750
  784
  821
  860
  900
  943
  988
  1,036
  1,086
  1,138
  1,194
Adjusted assets (=assets-cash), $m
  371
  380
  389
  400
  413
  426
  440
  456
  473
  491
  511
  531
  553
  577
  602
  628
  656
  686
  717
  750
  784
  821
  860
  900
  943
  988
  1,036
  1,086
  1,138
  1,194
Revenue / Adjusted assets
  1.604
  1.600
  1.604
  1.605
  1.600
  1.601
  1.605
  1.603
  1.603
  1.603
  1.601
  1.603
  1.604
  1.601
  1.601
  1.602
  1.602
  1.601
  1.601
  1.601
  1.603
  1.602
  1.601
  1.602
  1.602
  1.602
  1.601
  1.602
  1.603
  1.601
Average production assets, $m
  197
  202
  207
  213
  219
  227
  234
  243
  252
  261
  272
  283
  294
  307
  320
  334
  349
  365
  381
  399
  417
  437
  457
  479
  502
  526
  551
  578
  605
  635
Working capital, $m
  -14
  -15
  -15
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -28
  -29
  -30
  -32
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -46
Total debt, $m
  50
  53
  57
  60
  65
  69
  74
  80
  86
  92
  99
  106
  113
  121
  130
  139
  149
  159
  170
  181
  193
  206
  219
  233
  248
  264
  280
  298
  316
  335
Total liabilities, $m
  128
  131
  135
  139
  143
  147
  152
  158
  164
  170
  177
  184
  191
  200
  208
  217
  227
  237
  248
  259
  271
  284
  297
  312
  326
  342
  358
  376
  394
  413
Total equity, $m
  243
  248
  255
  262
  270
  279
  288
  298
  309
  321
  334
  347
  362
  377
  394
  411
  429
  448
  469
  490
  513
  537
  562
  589
  617
  646
  677
  710
  745
  781
Total liabilities and equity, $m
  371
  379
  390
  401
  413
  426
  440
  456
  473
  491
  511
  531
  553
  577
  602
  628
  656
  685
  717
  749
  784
  821
  859
  901
  943
  988
  1,035
  1,086
  1,139
  1,194
Debt-to-equity ratio
  0.210
  0.210
  0.220
  0.230
  0.240
  0.250
  0.260
  0.270
  0.280
  0.290
  0.300
  0.300
  0.310
  0.320
  0.330
  0.340
  0.350
  0.350
  0.360
  0.370
  0.380
  0.380
  0.390
  0.400
  0.400
  0.410
  0.410
  0.420
  0.420
  0.430
Adjusted equity ratio
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654
  0.654

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  37
  39
  40
  41
  43
  44
  46
  48
  50
  53
  68
  70
  73
  76
  79
  83
  86
  90
  94
  98
  102
  107
  112
  117
  122
  128
  134
  140
  147
  154
Depreciation, amort., depletion, $m
  37
  37
  38
  38
  39
  40
  41
  41
  42
  43
  27
  28
  29
  31
  32
  33
  35
  36
  38
  40
  42
  44
  46
  48
  50
  53
  55
  58
  61
  63
Funds from operations, $m
  74
  76
  78
  80
  82
  84
  87
  90
  93
  96
  95
  99
  102
  107
  111
  116
  121
  126
  132
  138
  144
  151
  158
  165
  173
  181
  189
  198
  208
  218
Change in working capital, $m
  0
  0
  0
  0
  0
  -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
Cash from operations, $m
  75
  76
  78
  80
  82
  85
  87
  90
  93
  97
  96
  99
  103
  108
  112
  117
  122
  127
  133
  139
  145
  152
  159
  166
  174
  182
  191
  200
  210
  220
Maintenance CAPEX, $m
  -19
  -20
  -20
  -21
  -21
  -22
  -23
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -31
  -32
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -46
  -48
  -50
  -53
  -55
  -58
  -61
New CAPEX, $m
  -4
  -5
  -5
  -6
  -6
  -7
  -8
  -8
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -18
  -19
  -21
  -22
  -23
  -24
  -25
  -27
  -28
  -29
Cash from investing activities, $m
  -23
  -25
  -25
  -27
  -27
  -29
  -31
  -31
  -33
  -35
  -36
  -38
  -40
  -41
  -44
  -46
  -48
  -51
  -53
  -56
  -58
  -61
  -65
  -68
  -71
  -74
  -78
  -82
  -86
  -90
Free cash flow, $m
  51
  52
  53
  53
  54
  56
  57
  58
  60
  62
  59
  61
  63
  66
  68
  71
  74
  77
  80
  83
  87
  91
  95
  99
  104
  108
  113
  118
  124
  130
Issuance/(repayment) of debt, $m
  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
  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  
  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
  54
  55
  56
  57
  59
  60
  62
  64
  66
  68
  66
  68
  71
  74
  77
  80
  83
  87
  91
  95
  99
  104
  108
  113
  118
  124
  130
  136
  142
  149
Retained Cash Flow (-), $m
  -5
  -6
  -6
  -7
  -8
  -9
  -9
  -10
  -11
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -25
  -27
  -28
  -30
  -31
  -33
  -34
  -36
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
  6
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  11
  12
  13
  13
  14
  14
  15
  16
  17
  17
  18
Cash available for distribution, $m
  49
  49
  50
  50
  51
  52
  52
  54
  55
  56
  53
  55
  57
  58
  61
  63
  65
  68
  70
  73
  76
  80
  83
  87
  90
  94
  99
  103
  108
  113
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
  47
  45
  43
  41
  39
  37
  35
  33
  31
  29
  25
  23
  22
  20
  18
  16
  14
  12
  11
  9
  8
  7
  5
  4
  4
  3
  2
  2
  1
  1
Current shareholders' claim on cash, %
  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

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 22.3
Price to Sales 0.7
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 15.1
Price to Free Cash Flow 18.4
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 91%.

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 5.4% 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 1%.

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 33.2%.

Life of production assets of 10 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 -2.4%. 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 33 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

▶ Why Resources Connection Stock Just Dropped 12%   [Jul-19-18 01:40PM  Motley Fool]
▶ Resources Connection: Fiscal 4Q Earnings Snapshot   [Jul-18-18 05:25PM  Associated Press]
▶ Sitrick And Company Opens Boston Office   [May-11-18 09:00AM  PR Newswire]
▶ Resources Connection beats 3Q profit forecasts   [Apr-04-18 04:17PM  Associated Press]
▶ Top Ranked Income Stocks to Buy for January 9th   [Jan-09-18 08:55AM  Zacks]
▶ Resources Connection beats Street 2Q forecasts   [Jan-03-18 04:15PM  Associated Press]
▶ 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]
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