The Liberty SiriusXM Group (NASDAQ:LSXM.K) Is Trading At A 25% Discount
I am going to run you through how I calculated the intrinsic value of The Liberty SiriusXM Group (NASDAQ:LSXM.K) using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in March 2018 so be sure check the latest calculation for Liberty SiriusXM Group here.
Crunching the numbers
I will be using the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To start off, I pulled together the analyst consensus forecast of LSXM.K’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 11.68%. 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$5.84B. Want to understand how I arrived at this number? Read our detailed analysis here.
Above is a visual representation of how LSXM.K’s earnings are expected to move in the future, which should give you some color on LSXM.K’s outlook. Secondly, I calculate the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is US$13.09B.
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$18.93B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $56.31, which, compared to the current share price of $42.09, we find that Liberty SiriusXM Group is about right, perhaps slightly undervalued at a 25.26% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For LSXM.K, there are three fundamental factors you should look at:
Financial Health: Does LSXM.K 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 LSXM.K’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 LSXM.K? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks 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.
