- By GF Value
The stock of Liberty Broadband (NAS:LBRDK, 30-year Financials) is believed to be possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $148.99 per share and the market cap of $28.9 billion, Liberty Broadband stock gives every indication of being possible value trap. GF Value for Liberty Broadband is shown in the chart below.
The reason we think that Liberty Broadband stock might be a value trap is because
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Liberty Broadband has a cash-to-debt ratio of 0.29, which is worse than 73% of the companies in the industry of Media - Diversified. GuruFocus ranks the overall financial strength of Liberty Broadband at 4 out of 10, which indicates that the financial strength of Liberty Broadband is poor. This is the debt and cash of Liberty Broadband over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Liberty Broadband has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $50.7 million and earnings of $2.17 a share. Its operating margin of -117.65% in the bottom 10% of the companies in the industry of Media - Diversified. Overall, GuruFocus ranks Liberty Broadband's profitability as poor. This is the revenue and net income of Liberty Broadband over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Liberty Broadband is 57.6%, which ranks better than 96% of the companies in the industry of Media - Diversified. The 3-year average EBITDA growth rate is -45.3%, which ranks in the bottom 10% of the companies in the industry of Media - Diversified.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Liberty Broadband's ROIC was -0.47, while its WACC came in at 7.13. The historical ROIC vs WACC comparison of Liberty Broadband is shown below:
Overall, the stock of Liberty Broadband (NAS:LBRDK, 30-year Financials) is believed to be possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in the industry of Media - Diversified. To learn more about Liberty Broadband stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.