Intrinsic value of FairPoint Communications - FRP

Previous Close

$15.95

  Intrinsic Value

$3.57

stock screener

  Rating & Target

str. sell

-78%

  Value-price divergence*

0%

Previous close

$15.95

 
Intrinsic value

$3.57

 
Up/down potential

-78%

 
Rating

str. sell

 
Value-price divergence*

0%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of FRP stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -4.07
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  824
  840
  860
  882
  907
  934
  964
  997
  1,033
  1,071
  1,112
  1,156
  1,203
  1,253
  1,306
  1,362
  1,422
  1,485
  1,552
  1,623
  1,697
  1,776
  1,859
  1,947
  2,039
  2,136
  2,238
  2,345
  2,459
  2,578
  2,703
Variable operating expenses, $m
 
  675
  690
  708
  728
  750
  774
  801
  829
  860
  893
  928
  966
  1,006
  1,049
  1,094
  1,142
  1,193
  1,246
  1,303
  1,363
  1,426
  1,493
  1,563
  1,637
  1,715
  1,797
  1,883
  1,974
  2,070
  2,170
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  595
  675
  690
  708
  728
  750
  774
  801
  829
  860
  893
  928
  966
  1,006
  1,049
  1,094
  1,142
  1,193
  1,246
  1,303
  1,363
  1,426
  1,493
  1,563
  1,637
  1,715
  1,797
  1,883
  1,974
  2,070
  2,170
Operating income, $m
  229
  166
  169
  174
  179
  184
  190
  196
  203
  211
  219
  228
  237
  247
  257
  268
  280
  293
  306
  320
  334
  350
  366
  383
  402
  421
  441
  462
  484
  508
  532
EBITDA, $m
  451
  283
  289
  297
  305
  315
  325
  336
  348
  361
  374
  389
  405
  422
  440
  459
  479
  500
  523
  546
  572
  598
  626
  655
  686
  719
  754
  790
  828
  868
  910
Interest expense (income), $m
  77
  77
  64
  66
  69
  72
  75
  78
  82
  86
  90
  95
  100
  105
  111
  117
  124
  130
  138
  145
  153
  162
  171
  180
  190
  201
  212
  224
  236
  249
  263
Earnings before tax, $m
  147
  88
  105
  108
  110
  112
  115
  118
  122
  125
  129
  133
  137
  141
  146
  151
  157
  162
  168
  174
  181
  188
  195
  203
  211
  220
  229
  238
  248
  259
  270
Tax expense, $m
  43
  24
  28
  29
  30
  30
  31
  32
  33
  34
  35
  36
  37
  38
  39
  41
  42
  44
  45
  47
  49
  51
  53
  55
  57
  59
  62
  64
  67
  70
  73
Net income, $m
  104
  65
  77
  79
  80
  82
  84
  86
  89
  91
  94
  97
  100
  103
  107
  110
  114
  118
  123
  127
  132
  137
  143
  148
  154
  160
  167
  174
  181
  189
  197

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  35
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,231
  1,256
  1,285
  1,318
  1,355
  1,396
  1,442
  1,491
  1,544
  1,601
  1,662
  1,728
  1,798
  1,873
  1,952
  2,037
  2,126
  2,220
  2,320
  2,426
  2,537
  2,655
  2,779
  2,910
  3,047
  3,192
  3,345
  3,506
  3,675
  3,853
  4,040
Adjusted assets (=assets-cash), $m
  1,196
  1,256
  1,285
  1,318
  1,355
  1,396
  1,442
  1,491
  1,544
  1,601
  1,662
  1,728
  1,798
  1,873
  1,952
  2,037
  2,126
  2,220
  2,320
  2,426
  2,537
  2,655
  2,779
  2,910
  3,047
  3,192
  3,345
  3,506
  3,675
  3,853
  4,040
Revenue / Adjusted assets
  0.689
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
  0.669
Average production assets, $m
  1,152
  1,174
  1,201
  1,232
  1,267
  1,305
  1,347
  1,393
  1,443
  1,496
  1,554
  1,615
  1,681
  1,750
  1,825
  1,903
  1,987
  2,075
  2,168
  2,267
  2,371
  2,481
  2,597
  2,719
  2,848
  2,984
  3,126
  3,277
  3,435
  3,601
  3,776
Working capital, $m
  8
  -19
  -20
  -20
  -21
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -31
  -33
  -34
  -36
  -37
  -39
  -41
  -43
  -45
  -47
  -49
  -51
  -54
  -57
  -59
  -62
Total debt, $m
  907
  753
  779
  808
  842
  879
  919
  964
  1,011
  1,063
  1,118
  1,177
  1,240
  1,308
  1,379
  1,455
  1,535
  1,620
  1,710
  1,805
  1,905
  2,011
  2,123
  2,241
  2,365
  2,495
  2,633
  2,777
  2,930
  3,090
  3,258
Total liabilities, $m
  1,285
  1,131
  1,157
  1,186
  1,220
  1,257
  1,297
  1,342
  1,389
  1,441
  1,496
  1,555
  1,618
  1,686
  1,757
  1,833
  1,913
  1,998
  2,088
  2,183
  2,283
  2,389
  2,501
  2,619
  2,743
  2,873
  3,011
  3,155
  3,308
  3,468
  3,636
Total equity, $m
  -54
  126
  129
  132
  136
  140
  144
  149
  154
  160
  166
  173
  180
  187
  195
  204
  213
  222
  232
  243
  254
  265
  278
  291
  305
  319
  335
  351
  368
  385
  404
Total liabilities and equity, $m
  1,231
  1,257
  1,286
  1,318
  1,356
  1,397
  1,441
  1,491
  1,543
  1,601
  1,662
  1,728
  1,798
  1,873
  1,952
  2,037
  2,126
  2,220
  2,320
  2,426
  2,537
  2,654
  2,779
  2,910
  3,048
  3,192
  3,346
  3,506
  3,676
  3,853
  4,040
Debt-to-equity ratio
  -16.796
  5.990
  6.060
  6.130
  6.210
  6.290
  6.380
  6.460
  6.550
  6.640
  6.730
  6.810
  6.900
  6.980
  7.060
  7.140
  7.220
  7.300
  7.370
  7.440
  7.510
  7.580
  7.640
  7.700
  7.760
  7.820
  7.870
  7.920
  7.970
  8.020
  8.060
Adjusted equity ratio
  -0.074
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  104
  65
  77
  79
  80
  82
  84
  86
  89
  91
  94
  97
  100
  103
  107
  110
  114
  118
  123
  127
  132
  137
  143
  148
  154
  160
  167
  174
  181
  189
  197
Depreciation, amort., depletion, $m
  222
  117
  120
  123
  127
  131
  135
  139
  144
  150
  155
  162
  168
  175
  182
  190
  199
  208
  217
  227
  237
  248
  260
  272
  285
  298
  313
  328
  343
  360
  378
Funds from operations, $m
  122
  182
  197
  202
  207
  213
  219
  226
  233
  241
  249
  258
  268
  278
  289
  301
  313
  326
  340
  354
  369
  385
  402
  420
  439
  459
  480
  502
  525
  549
  575
Change in working capital, $m
  -12
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
Cash from operations, $m
  134
  182
  198
  202
  207
  213
  220
  226
  234
  242
  250
  259
  269
  279
  290
  302
  314
  327
  341
  356
  371
  387
  404
  422
  441
  461
  482
  504
  527
  552
  577
Maintenance CAPEX, $m
  0
  -115
  -117
  -120
  -123
  -127
  -131
  -135
  -139
  -144
  -150
  -155
  -162
  -168
  -175
  -182
  -190
  -199
  -208
  -217
  -227
  -237
  -248
  -260
  -272
  -285
  -298
  -313
  -328
  -343
  -360
New CAPEX, $m
  -117
  -23
  -27
  -31
  -35
  -38
  -42
  -46
  -50
  -54
  -57
  -61
  -66
  -70
  -74
  -79
  -83
  -88
  -93
  -99
  -104
  -110
  -116
  -122
  -129
  -136
  -143
  -150
  -158
  -166
  -175
Cash from investing activities, $m
  -118
  -138
  -144
  -151
  -158
  -165
  -173
  -181
  -189
  -198
  -207
  -216
  -228
  -238
  -249
  -261
  -273
  -287
  -301
  -316
  -331
  -347
  -364
  -382
  -401
  -421
  -441
  -463
  -486
  -509
  -535
Free cash flow, $m
  16
  45
  53
  51
  50
  48
  47
  46
  45
  44
  43
  43
  42
  42
  41
  41
  41
  40
  40
  40
  40
  40
  40
  40
  40
  41
  41
  41
  42
  42
  42
Issuance/(repayment) of debt, $m
  -7
  -154
  26
  30
  33
  37
  41
  44
  48
  52
  55
  59
  63
  67
  71
  76
  80
  85
  90
  95
  100
  106
  112
  118
  124
  131
  137
  145
  152
  160
  168
Issuance/(repurchase) of shares, $m
  0
  115
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -7
  -39
  26
  30
  33
  37
  41
  44
  48
  52
  55
  59
  63
  67
  71
  76
  80
  85
  90
  95
  100
  106
  112
  118
  124
  131
  137
  145
  152
  160
  168
Total cash flow (excl. dividends), $m
  8
  5
  79
  81
  83
  85
  88
  90
  93
  96
  99
  102
  105
  109
  113
  117
  121
  125
  130
  135
  140
  146
  152
  158
  164
  171
  178
  186
  194
  202
  211
Retained Cash Flow (-), $m
  53
  -180
  -3
  -3
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -11
  -11
  -12
  -12
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -19
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -174
  76
  78
  79
  81
  83
  85
  87
  90
  92
  95
  98
  101
  105
  108
  112
  116
  120
  125
  129
  134
  139
  145
  151
  157
  163
  170
  177
  184
  192
Discount rate, %
 
  13.70
  14.39
  15.10
  15.86
  16.65
  17.49
  18.36
  19.28
  20.24
  21.25
  22.32
  23.43
  24.60
  25.83
  27.13
  28.48
  29.91
  31.40
  32.97
  34.62
  36.35
  38.17
  40.08
  42.08
  44.18
  46.39
  48.71
  51.15
  53.71
  56.39
PV of cash for distribution, $m
 
  -153
  58
  51
  44
  38
  32
  26
  21
  17
  13
  10
  8
  6
  4
  3
  2
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0

FairPoint Communications, Inc. provides communications services to business, wholesale, and residential customers in the United States. It provides high capacity data services, including optical, Ethernet, IP services, and Ethernet virtual circuit technology for cellular backhaul; and private line special access services, as well as hosted primary branch exchange services over its Ethernet network. The company also offers Internet services, including cable modem Internet service, and fiber to the home and wireless Internet access services; and data center colocation services. In addition, it provides local calling services, such as basic local lines and local private lines; long distance services; and 9-1-1 Services. Further, the company offers network transport services, including special access services, such as DS-1 and DS-3 services; and high speed digital services comprising Ethernet-based services provisioned over fiber and copper facilities, as well as network switched, intrastate, and intrastate access services. Additionally, it publishes telephone directories; and provides video services by reselling DirectTV content, as well as offers cable and IP television video-over-digital subscriber line services. The company also provides project-based implementation support services. As of June 30, 2016, it operated approximately 311,000 broadband subscribers; 15,100 Ethernet circuits; and 389,000 residential voice lines in 17 states. The company was incorporated in 1991 and is headquartered in Charlotte, North Carolina.

FINANCIAL RATIOS  of  FairPoint Communications (FRP)

Valuation Ratios
P/E Ratio 4.2
Price to Sales 0.5
Price to Book -8
Price to Tangible Book
Price to Cash Flow 3.2
Price to Free Cash Flow 25.4
Growth Rates
Sales Growth Rate -4.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 0.9%
Cap. Spend. - 3 Yr. Gr. Rate -1.8%
Financial Strength
Quick Ratio 4
Current Ratio 0
LT Debt to Equity -1664.8%
Total Debt to Equity -1679.6%
Interest Coverage 3
Management Effectiveness
Return On Assets 12.4%
Ret/ On Assets - 3 Yr. Avg. 6.5%
Return On Total Capital 11.8%
Ret/ On T. Cap. - 3 Yr. Avg. -1%
Return On Equity -378.2%
Return On Equity - 3 Yr. Avg. -126.1%
Asset Turnover 0.6
Profitability Ratios
Gross Margin 53.3%
Gross Margin - 3 Yr. Avg. 51.6%
EBITDA Margin 54.1%
EBITDA Margin - 3 Yr. Avg. 38%
Operating Margin 27.8%
Oper. Margin - 3 Yr. Avg. 12.3%
Pre-Tax Margin 17.8%
Pre-Tax Margin - 3 Yr. Avg. 3.3%
Net Profit Margin 12.6%
Net Profit Margin - 3 Yr. Avg. 2.7%
Effective Tax Rate 29.3%
Eff/ Tax Rate - 3 Yr. Avg. 15.4%
Payout Ratio 0%

FRP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FRP stock intrinsic value calculation we used $824 million for the last fiscal year's total revenue generated by FairPoint Communications. The default revenue input number comes from 2016 income statement of FairPoint Communications. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our FRP stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 13.7%, whose default value for FRP is calculated based on our internal credit rating of FairPoint Communications, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of FairPoint Communications.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of FRP stock the variable cost ratio is equal to 80.3%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for FRP stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 8.5% for FairPoint Communications.

Corporate tax rate of 27% is the nominal tax rate for FairPoint Communications. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the FRP stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for FRP are equal to 139.7%.

Life of production assets of 10 years is the average useful life of capital assets used in FairPoint Communications operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for FRP is equal to -2.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $-54 million for FairPoint Communications - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 25.773 million for FairPoint Communications is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of FairPoint Communications at the current share price and the inputted number of shares is $0.4 billion.

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Stock chart of FRP Financial statements of FRP
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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