- By GF Value
The stock of Liberty Broadband (NAS:LBRDA, 30-year Financials) is estimated 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 $158.18 per share and the market cap of $30.6 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
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Liberty Broadband has a cash-to-debt ratio of 0.25, which which ranks worse than 75% of the companies in the industry of Media - Diversified. The overall financial strength of Liberty Broadband is 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 $293.1 million and earnings of $2.48 a share. Its operating margin of -14.76% worse than 76% 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:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth 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 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 -0.30, while its WACC came in at 6.93. The historical ROIC vs WACC comparison of Liberty Broadband is shown below:
In short, the stock of Liberty Broadband (NAS:LBRDA, 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.