Korn Ferry International Project

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  • 1

    Table of Contents

    Executive Summary 6 Industry Analysis 7 Accounting Analysis 9 Financial Analysis 10 Valuation Analysis 14

    Company Overview 14 Industry Overview 16 Five Force Model 16

    Rivalry Among Existing Firms 17 Industry Growth 19 Concentration 21 Switching Costs 21 Fixed to Variable Cost Ratio 22 Conclusion 22

    Threats of New Entrants 23 Economies of Scale 23 First Mover Advantage 24 Assess to Channels of Distribution and Relationships 24 Legal Barriers 25 Conclusion 25

    Threat of Substitute Products 26 Efficiency and Price 26 Customers Willingness to Switch 27 Conclusion 27

    Bargaining Power of Customers 28 Switching Costs 28 Differentiation 28 Importance of Product for Cost and Quality 29

  • 2

    Number of Customers 29 Conclusion 30

    Bargaining Power of Suppliers 30 Switching Costs 31 Differentiation 31 Number and Quality of Suppliers 32 Conclusion 32

    Conclusion 32 Key Success Factors 33

    Cost Leadership 33 Differentiation 34

    Functionality Segmentation 34 Superior Customer Service 36 Brand Image 37

    Competitive Advantages Analysis 38 Functionality Segmentation 38 Superior Customer Service 40 Brand Image 43 Conclusion 44

    Introduction to Accounting Analysis 45 Key Accounting Policies 45

    Type One Key Accounting Policies 46 Economies of Scale 46 Value Adding Services 47

    Type Two Key Accounting Policies 48 Goodwill 49 Operating Lease 50 Defined Benefit Pension Plan 50

    Assessing the Degree of Potential Accounting Policies 50

  • 3

    Goodwill 51 Leasing Activities 52 Conclusion 52

    Evaluation of Actual Accounting Strategy 52 Goodwill 53 Pension Plans 55 Leasing Activities 55 Conclusion 56

    Quality of Disclosure 56 Pension Plans 57 Goodwill 58 Operating and Capital Leases 58

    Potential Red Flags 59 Accounting Distortions 60

    Goodwill 60 Operating Leases 62 Conclusion 65

    Financial Statements 65 Balance Sheet 75 Income Statement 75 Conclusion 75

    Financial Analysis 76 Liquidity Analysis 76

    Current Ratio 77 Quick Asset Ratio 78 Conclusion 80

    Operating Efficiency Ratios 80 Inventory Turnover 80 Days Supply of Inventory 80

  • 4

    Accounts Receivable Turnover 81 Days Sales Outstanding 83 Cash-to-Cash Cycle 84 Working Capital Turnover 86 Conclusion 87

    Profitability Ratio 87 Gross Profit Margin 88 Operating Profit Margin 89 Net Profit Margin 90 Asset Turnover 92 Return on Assets 93 Return on Equity 95 Conclusion 96

    Capital Structure Ratios 96 Internal Growth Rate 97 Sustainable Growth Rate 98 Plant, Property, and Equipment Turnover 99 Debt to Equity Ratio 100 Times Interest Earned 102 Debt Service Margin 103 Altman Z-Score 104 Conclusion 106

    Financial Forecasting 106 Income Statement 106

    Dividends Forecasting 113 Balance Sheet 113 Statement of Cash Flows 120

    Cost of Capital Estimation 124 Cost of Debt 124

  • 5

    Cost of Equity 125 Backdoor Cost of Equity 128 Weighted Average Cost of Capital 128

    Conclusion 130 Method of Comparables 130

    Trailing P/E Ratio 131 Forward P/E Ratio 132 Price to Book Ratio 132 Dividends to Price Ratio 133 Price Earnings Growth Ratio 134 Price to EBITDA 135 Price to Free Cash Flows 136 Enterprise Value to EBITDA 137 Conclusion 138

    Intrinsic Valuation Models 138 Discounted Dividends Models 138 Discounted Free Cash Flow Model 140 Residual Income Model 142 Long Run Residual Model 144 Abnormal Earnings Growth 147

    Analyst Recommendation 149 References 151 Appendix 152

    Industry Growth 152 Financial Statements 152

    Balance Sheet 152 Income Statement 154

  • 6

    Executive Summary

    2012

    2013

    2014

    2015

    2016

    Obe

    rservedPrice(11/1/16

    )$2

    0.39

    As-Stated

    3.52

    2.95

    3.15

    3.22

    2.05

    Re-Stated

    2.62

    2.31

    2.61

    2.51

    1.55

    52W

    eekRa

    nge

    $18.57

    $38.20

    Revene

    1.35

    BAs-Stated

    Re-Stated

    As-StatedRe-Stated

    MarketC

    ap1.18

    BRO

    E3.79

    %-2.82%

    IGR

    0.70

    %-0.40%

    SharesOutstan

    ding

    57.92M

    ROA

    2.30

    %-1.40%

    SGR

    6.50

    %-0.80%

    As-Stated

    Re-Stated

    Book

    Value

    ofE

    quity

    1.04

    7B

    870M

    Compa

    rable

    P/ETrailing

    9.49

    $

    Overvalue

    dN/A

    N/A

    20YearB

    ondRe

    gressio

    nsR^

    2Be

    ta2FactorKe

    P/EFo

    rward

    29.04

    $

    Und

    ervalued

    14.30

    $

    Overvalue

    d72

    Mon

    th35

    .24%

    1.89

    17.13%

    P/B

    28.62

    $

    Und

    ervalued

    24.54

    $

    Und

    ervalued

    60Mon

    th18

    .01%

    1.26

    12.77%

    Divide

    nd/Pric

    e26

    .69

    $

    Und

    ervalued

    26.69

    $

    Und

    ervalued

    48Mon

    th14

    .90%

    1.17

    12.14%

    P.E.G

    6.98

    $

    Overvalue

    dN/A

    N/A

    36Mon

    th13

    .07%

    1.06

    11.33%

    P/EB

    ITDA

    11.96

    $

    Overvalue

    d2.26

    $

    Overvalue

    d24

    Mon

    th7.68

    %0.70

    8.81

    %EV

    /EBITD

    A12

    .07

    $

    Overvalue

    d12

    .07

    $

    Overvalue

    dP/FC

    F26

    .05

    $

    Und

    ervalued

    26.05

    $

    Und

    ervalued

    Backdo

    orKe

    8.76

    %WAC

    CBT

    8.22

    %WAC

    CAT

    8.06

    %Va

    luationMod

    elAs-StatedRe

    sult

    Re-StatedRe

    sult

    Publish

    edBeta(Goo

    gleFina

    nce)

    1.28

    Discou

    nted

    Dividen

    ds8.72

    N/A

    Discou

    nted

    FreeCa

    shFlows

    22.13

    N/A

    Resid

    ualIncom

    e20

    .31

    13.02

    LowerBou

    ndExpe

    cted

    Value

    Upp

    erBou

    ndLongRun

    Residua

    lIncom

    e19

    .73

    15.60

    CostofE

    quity

    Ke

    7.81

    %12

    .70%

    17.73%

    Abno

    rmalEarningsG

    rowth

    18.61

    10.85

    Size-AdjustedKe

    6.70

    %8.76

    %13

    .70%

    Instrin

    sicV

    alua

    tionMod

    els

    AnalystR

    ecom

    men

    datio

    n:Hold(fa

    irva

    lue)

    KornFerry-NYS

    E11

    /1/1

    6Altm

    an'sZ-Sco

    re

    Releva

    ntRatios

    Metho

    dofCom

    parablesValua

    tion

    CostofC

    apita

    lAs-StatedRe

    sult

    Re-StatedRe

    sult

  • 7

    Industry Analysis

    Korn/Ferry International is a human resources firm operating within the staffing and outsourcing services industry. The firms primary competitors include Manpower Group,

    On Assignment, Heidrick & Struggles, and Kelly Services. Korn Ferry has three

    segments: Executive Recruitment, which matches executives to companies; Hay Group, which provides leadership and talent consulting for both temporary and permanent

    employees; and Futurestep as an online tool for recruiting professional talent. These competitors were selected because of their similar business models to Korn Ferry,

    specifically functional segmentation.

    We analyzed the staffing industry based on Porters Five Forces Model. According to this model, the intensity of the competition between firms determines the potential for

    creating profits. The competitive nature of this industry is demonstrated below in figure 1.

    Figure 1

    CATEGORY QUALITIES COMPETITION

    RivalryAmongExistingFirms

    CyclicalindustrygrowthLowlevelsofconcentrationHighswitchingcosts

    High

    ThreatofNewEntrants

    LowbarrierstoentryPresenceoffirstmoveradvantage High

    ThreatofSubstituteProducts

    LowbarrierstoentryBuyers'willingnesstoswitchfirms High

    BargainingPowerofCustomers

    LowswitchingcostsModeratedifferentiationHighimportanceofproductforcost/qualityLownumberofcustomers,highnumberoffirms

    Mixed-High

    BargainingPowerofSuppliers

    ModerateswitchingcostsModeratedifferentiationHighimportanceofproductforcost/qualityModeratenumberofsuppliers,highnumberoffirms

    Mixed-High

    FIVEFORCESMODEL

  • 8

    From our analysis, we have determined that the degree of actual and potential competition is high.

    The fluctuation in industry growth is dependent on economic growth. Demand for the

    firms service is hindered by slowed economic activities. Because the industry is not growing rapidly, firms need not take market share from each other to grow.

    Additionally, no one firm currently represents a large enough market share to dominate the entire industry, making it a price taking industry. Though firms attempt to

    differentiate their services, it is still easy for clients to switch to a different firm. Considering these factors, the rivalry among existing firms is somewhat high.

    The threat of new entrants is also high. This is due to the low barriers of entry into the

    industry. Demonstrating economies of scale by expanding physical presence is becoming less important of a factor in competing due to the increase in technology.

    Clients are now able to perform services online through web-based systems and easily switch from a traditional firm to a more convenient one. In addition to this, firms that

    are first movers into the online staffing industry may gain a competitive advantage against traditional firms by offering a lower-cost, similar quality service

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