Calculating The Fair Value Of Lumentum Holdings Inc (NASDAQ:LITE)
I am going to run you through how I calculated the intrinsic value of Lumentum Holdings Inc (NASDAQ:LITE) using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after March 2018 then I highly recommend you check out the latest calculation for Lumentum Holdings here.
Crunching the numbers
I’ve used the 2-stage growth model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To begin, I pulled together the analyst consensus forecast of LITE’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 9.57%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of US$1.07B. Want to know how I calculated this value? Take a look at our detailed analysis here.
In the visual above, we see how how LITE’s earnings are expected to move going forward, which should give you some color on LITE’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes US$3.10B.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$4.16B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $66.50, which, compared to the current share price of $69.05, we find that Lumentum Holdings is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For LITE, I’ve put together three pertinent aspects you should look at:
Financial Health: Does LITE 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 LITE’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of LITE? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
