Liberty Latin America's estimated fair value is US$18.19 based on 2 Stage Free Cash Flow to Equity
Liberty Latin America's US$10.04 share price signals that it might be 45% undervalued
Analyst price target for LILA is US$9.58 which is 47% below our fair value estimate
How far off is Liberty Latin America Ltd. (NASDAQ:LILA) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
The Model
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$228.0m
US$227.4m
US$228.7m
US$231.2m
US$234.6m
US$238.7m
US$243.3m
US$248.4m
US$253.8m
US$259.4m
Growth Rate Estimate Source
Est @ -1.37%
Est @ -0.24%
Est @ 0.54%
Est @ 1.09%
Est @ 1.48%
Est @ 1.75%
Est @ 1.94%
Est @ 2.07%
Est @ 2.16%
Est @ 2.23%
Present Value ($, Millions) Discounted @ 8.3%
US$211
US$194
US$180
US$168
US$157
US$148
US$139
US$131
US$124
US$117
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$1.6b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.3%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$4.5b÷ ( 1 + 8.3%)10= US$2.0b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$3.6b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$10.0, the company appears quite good value at a 45% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Important Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Liberty Latin America as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.3%, which is based on a levered beta of 1.287. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Liberty Latin America
Strength
No major strengths identified for LILA.
Weakness
Interest payments on debt are not well covered.
Opportunity
Expected to breakeven next year.
Has sufficient cash runway for more than 3 years based on current free cash flows.
Good value based on P/S ratio and estimated fair value.
Significant insider buying over the past 3 months.
Have LILA insiders been buying lately?
Threat
Debt is not well covered by operating cash flow.
Is LILA well equipped to handle threats?
Next Steps:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Liberty Latin America, there are three important elements you should further research:
Financial Health: Does LILA have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does LILA's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
主要见解
基于两阶段自由现金流方法,Liberty Latin America的估计公允价值为18.19美元。
Liberty Latin America的10.04美元股票价格表明其可能被低估了45%。
Analyst对LILA的目标价为9.58美元,相当于我们公允价值估计的47%以下。
Liberty Latin America Ltd. (NASDAQ:LILA)距其内在价值有多远?根据最近的财务数据,我们将通过使用折现现金流(DCF)模型,通过考虑预期未来现金流,并将其折现到现值,来查看股票是否被合理定价。类似的模型可能超出了一个普通人的理解范围,但是它们相当容易理解。
我们应该指出,折现现金流的最重要的输入是折现率和实际现金流。如果您不同意这些结果,请您自行计算并调整假设。DCF也不考虑行业的可能周期性或公司未来的资本需求,因此它不能全面展示公司的潜力表现。考虑到我们是作为潜在的股东观察Liberty Latin America的,所以使用的折现率是权益成本,而不是资本成本(或加权平均成本资本,WACC),后者考虑到了公司的债务。在本计算中,我们使用了8.3%的折现率,该折现率基于1.287的杠杆贝塔。Beta是对比整个市场的股票波动性的度量。我们从全球可比公司的平均β值中获得我们的β值,在0.8至2.0的范围内施加极限,这是一个稳定业务的合理范围。
Liberty Latin America的SWOT分析
优势
LILA没有明显的优势。
弱势
债务利息支付能力不太好。
机会
预计明年盈亏相抵。
根据当前自由现金流,财务运营资金足够支撑三年以上。
根据市销率和估计的公平价值,TWKS的价值很好。
过去3个月内有重要内部人士买进。
LILA内部人员最近有没有买入?
威胁
运营现金流无法很好地覆盖债务。
LILA是否有足够的能力来应对威胁?
下一步:
虽然DCF计算方法很重要,但在研究公司时,不能只看这个指标。 通过应用不同的情况和假设,看看它们如何影响公司的估值。例如,如果期末价值增长率稍有调整,就可以大大改变整体结果。为什么股价会低于内在价值?对于Liberty Latin America公司,您应该进一步研究以下三个重要因素: