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
