Intrinsic value of LSC Communications - LKSD

Previous Close

$16.07

  Intrinsic Value

$25.07

stock screener

  Rating & Target

str. buy

+56%

  Value-price divergence*

+234%

Previous close

$16.07

 
Intrinsic value

$25.07

 
Up/down potential

+56%

 
Rating

str. buy

 
Value-price divergence*

+234%

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

We calculate the intrinsic value of LKSD 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 0.6

 

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, %
  -2.38
  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
  3,654
  3,727
  3,813
  3,911
  4,021
  4,143
  4,276
  4,422
  4,580
  4,750
  4,932
  5,127
  5,335
  5,556
  5,792
  6,042
  6,307
  6,587
  6,883
  7,196
  7,527
  7,876
  8,244
  8,632
  9,040
  9,471
  9,924
  10,401
  10,903
  11,431
  11,986
Variable operating expenses, $m
 
  3,593
  3,675
  3,769
  3,875
  3,992
  4,121
  4,261
  4,413
  4,576
  4,751
  4,931
  5,131
  5,344
  5,570
  5,810
  6,065
  6,335
  6,620
  6,921
  7,239
  7,574
  7,928
  8,301
  8,694
  9,108
  9,544
  10,003
  10,485
  10,993
  11,527
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
  3,479
  3,593
  3,675
  3,769
  3,875
  3,992
  4,121
  4,261
  4,413
  4,576
  4,751
  4,931
  5,131
  5,344
  5,570
  5,810
  6,065
  6,335
  6,620
  6,921
  7,239
  7,574
  7,928
  8,301
  8,694
  9,108
  9,544
  10,003
  10,485
  10,993
  11,527
Operating income, $m
  175
  134
  138
  141
  146
  150
  155
  161
  167
  174
  180
  196
  204
  213
  222
  231
  242
  252
  264
  276
  288
  302
  316
  331
  346
  363
  380
  398
  418
  438
  459
EBITDA, $m
  346
  300
  307
  315
  324
  334
  345
  356
  369
  383
  398
  413
  430
  448
  467
  487
  508
  531
  555
  580
  607
  635
  665
  696
  729
  763
  800
  838
  879
  921
  966
Interest expense (income), $m
  0
  26
  27
  29
  30
  32
  34
  36
  38
  41
  43
  46
  49
  53
  56
  60
  64
  68
  73
  77
  82
  88
  93
  99
  105
  112
  119
  126
  133
  141
  150
Earnings before tax, $m
  157
  108
  110
  113
  116
  118
  122
  125
  129
  133
  137
  150
  155
  160
  166
  171
  178
  184
  191
  198
  206
  214
  223
  232
  241
  251
  262
  273
  284
  296
  309
Tax expense, $m
  51
  29
  30
  30
  31
  32
  33
  34
  35
  36
  37
  41
  42
  43
  45
  46
  48
  50
  52
  54
  56
  58
  60
  63
  65
  68
  71
  74
  77
  80
  84
Net income, $m
  106
  79
  81
  82
  84
  86
  89
  91
  94
  97
  100
  110
  113
  117
  121
  125
  130
  134
  139
  145
  150
  156
  162
  169
  176
  183
  191
  199
  207
  216
  226

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  86
  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
  1,952
  1,904
  1,947
  1,997
  2,054
  2,116
  2,184
  2,258
  2,339
  2,426
  2,519
  2,618
  2,725
  2,838
  2,958
  3,086
  3,221
  3,364
  3,515
  3,675
  3,844
  4,022
  4,210
  4,408
  4,617
  4,837
  5,068
  5,312
  5,568
  5,838
  6,122
Adjusted assets (=assets-cash), $m
  1,866
  1,904
  1,947
  1,997
  2,054
  2,116
  2,184
  2,258
  2,339
  2,426
  2,519
  2,618
  2,725
  2,838
  2,958
  3,086
  3,221
  3,364
  3,515
  3,675
  3,844
  4,022
  4,210
  4,408
  4,617
  4,837
  5,068
  5,312
  5,568
  5,838
  6,122
Revenue / Adjusted assets
  1.958
  1.957
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
  1.958
Average production assets, $m
  803
  820
  839
  860
  885
  911
  941
  973
  1,008
  1,045
  1,085
  1,128
  1,174
  1,222
  1,274
  1,329
  1,387
  1,449
  1,514
  1,583
  1,656
  1,733
  1,814
  1,899
  1,989
  2,084
  2,183
  2,288
  2,399
  2,515
  2,637
Working capital, $m
  393
  365
  374
  383
  394
  406
  419
  433
  449
  465
  483
  502
  523
  545
  568
  592
  618
  646
  675
  705
  738
  772
  808
  846
  886
  928
  973
  1,019
  1,068
  1,120
  1,175
Total debt, $m
  794
  776
  815
  860
  910
  965
  1,026
  1,092
  1,164
  1,241
  1,324
  1,412
  1,507
  1,608
  1,715
  1,828
  1,949
  2,076
  2,211
  2,353
  2,503
  2,662
  2,829
  3,006
  3,191
  3,387
  3,593
  3,810
  4,038
  4,278
  4,530
Total liabilities, $m
  1,712
  1,694
  1,733
  1,778
  1,828
  1,883
  1,944
  2,010
  2,082
  2,159
  2,242
  2,330
  2,425
  2,526
  2,633
  2,746
  2,867
  2,994
  3,129
  3,271
  3,421
  3,580
  3,747
  3,924
  4,109
  4,305
  4,511
  4,728
  4,956
  5,196
  5,448
Total equity, $m
  240
  209
  214
  220
  226
  233
  240
  248
  257
  267
  277
  288
  300
  312
  325
  339
  354
  370
  387
  404
  423
  442
  463
  485
  508
  532
  558
  584
  613
  642
  673
Total liabilities and equity, $m
  1,952
  1,903
  1,947
  1,998
  2,054
  2,116
  2,184
  2,258
  2,339
  2,426
  2,519
  2,618
  2,725
  2,838
  2,958
  3,085
  3,221
  3,364
  3,516
  3,675
  3,844
  4,022
  4,210
  4,409
  4,617
  4,837
  5,069
  5,312
  5,569
  5,838
  6,121
Debt-to-equity ratio
  3.308
  3.710
  3.810
  3.910
  4.030
  4.150
  4.270
  4.400
  4.520
  4.650
  4.780
  4.900
  5.030
  5.150
  5.270
  5.390
  5.500
  5.610
  5.720
  5.820
  5.920
  6.020
  6.110
  6.200
  6.280
  6.370
  6.440
  6.520
  6.590
  6.660
  6.730
Adjusted equity ratio
  0.083
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  106
  79
  81
  82
  84
  86
  89
  91
  94
  97
  100
  110
  113
  117
  121
  125
  130
  134
  139
  145
  150
  156
  162
  169
  176
  183
  191
  199
  207
  216
  226
Depreciation, amort., depletion, $m
  171
  166
  170
  174
  179
  184
  189
  195
  202
  209
  217
  217
  226
  235
  245
  256
  267
  279
  291
  304
  318
  333
  349
  365
  382
  401
  420
  440
  461
  484
  507
Funds from operations, $m
  191
  245
  250
  256
  263
  270
  278
  287
  296
  306
  317
  326
  339
  352
  366
  381
  396
  413
  431
  449
  469
  489
  511
  534
  558
  584
  611
  639
  669
  700
  733
Change in working capital, $m
  -40
  7
  8
  10
  11
  12
  13
  14
  15
  17
  18
  19
  20
  22
  23
  24
  26
  27
  29
  31
  32
  34
  36
  38
  40
  42
  44
  47
  49
  52
  54
Cash from operations, $m
  231
  238
  242
  247
  252
  258
  265
  273
  281
  290
  299
  307
  318
  330
  343
  356
  370
  386
  402
  418
  436
  455
  475
  496
  518
  542
  566
  592
  620
  648
  678
Maintenance CAPEX, $m
  0
  -154
  -158
  -161
  -165
  -170
  -175
  -181
  -187
  -194
  -201
  -209
  -217
  -226
  -235
  -245
  -256
  -267
  -279
  -291
  -304
  -318
  -333
  -349
  -365
  -382
  -401
  -420
  -440
  -461
  -484
New CAPEX, $m
  -48
  -17
  -19
  -22
  -24
  -27
  -29
  -32
  -35
  -37
  -40
  -43
  -46
  -49
  -52
  -55
  -58
  -62
  -65
  -69
  -73
  -77
  -81
  -85
  -90
  -95
  -100
  -105
  -110
  -116
  -122
Cash from investing activities, $m
  -41
  -171
  -177
  -183
  -189
  -197
  -204
  -213
  -222
  -231
  -241
  -252
  -263
  -275
  -287
  -300
  -314
  -329
  -344
  -360
  -377
  -395
  -414
  -434
  -455
  -477
  -501
  -525
  -550
  -577
  -606
Free cash flow, $m
  190
  66
  65
  64
  62
  61
  60
  60
  59
  59
  58
  56
  56
  56
  56
  56
  57
  57
  58
  58
  59
  60
  61
  62
  63
  65
  66
  67
  69
  71
  73
Issuance/(repayment) of debt, $m
  799
  34
  39
  45
  50
  55
  61
  66
  72
  77
  83
  89
  95
  101
  107
  114
  120
  127
  135
  142
  150
  159
  167
  176
  186
  196
  206
  217
  228
  240
  252
Issuance/(repurchase) of shares, $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
  0
Cash from financing (excl. dividends), $m  
  -179
  34
  39
  45
  50
  55
  61
  66
  72
  77
  83
  89
  95
  101
  107
  114
  120
  127
  135
  142
  150
  159
  167
  176
  186
  196
  206
  217
  228
  240
  252
Total cash flow (excl. dividends), $m
  8
  100
  104
  108
  112
  117
  121
  126
  131
  136
  141
  144
  150
  156
  163
  170
  177
  184
  192
  201
  209
  219
  228
  238
  249
  260
  272
  284
  297
  311
  325
Retained Cash Flow (-), $m
  1,037
  -3
  -5
  -6
  -6
  -7
  -8
  -8
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -27
  -28
  -30
  -31
Prev. year cash balance distribution, $m
 
  34
  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
 
  131
  100
  103
  106
  110
  114
  118
  122
  126
  131
  133
  139
  144
  150
  156
  162
  169
  176
  183
  191
  199
  208
  217
  226
  236
  247
  258
  269
  281
  294
Discount rate, %
 
  8.00
  8.40
  8.82
  9.26
  9.72
  10.21
  10.72
  11.26
  11.82
  12.41
  13.03
  13.68
  14.37
  15.09
  15.84
  16.63
  17.46
  18.34
  19.25
  20.22
  21.23
  22.29
  23.40
  24.57
  25.80
  27.09
  28.45
  29.87
  31.36
  32.93
PV of cash for distribution, $m
 
  121
  85
  80
  75
  69
  63
  58
  52
  46
  41
  35
  30
  25
  21
  17
  14
  11
  8
  6
  5
  3
  2
  2
  1
  1
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  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
  100.0

LSC Communications, Inc. focuses on traditional and digital print, print-related services and office products. The Company's segments are Print and Office Products. The Company, through its Print segment, provides a range of print product offerings, which include magazines, catalogs, retail inserts, books and directories. In addition to printed products, the Company also provides a number of print-related services, such as supply chain management, mail services, e-book formatting and distribution services. Its Print segment services over 3,000 customers, including publishers of magazines, books and directories, online retailers, catalogers, mass merchandisers and contract stationers. In its Office Products segment, the Company manufactures and sells a range of branded and private label products, primarily within the core categories, including filing products; note-taking products; binder products; tax and stock forms, and envelopes.

FINANCIAL RATIOS  of  LSC Communications (LKSD)

Valuation Ratios
P/E Ratio 4.9
Price to Sales 0.1
Price to Book 2.2
Price to Tangible Book
Price to Cash Flow 2.3
Price to Free Cash Flow 2.8
Growth Rates
Sales Growth Rate -2.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 14.3%
Cap. Spend. - 3 Yr. Gr. Rate -9.5%
Financial Strength
Quick Ratio 2
Current Ratio 0
LT Debt to Equity 309.2%
Total Debt to Equity 330.8%
Interest Coverage 0
Management Effectiveness
Return On Assets 5.3%
Ret/ On Assets - 3 Yr. Avg. 5.1%
Return On Total Capital 9.2%
Ret/ On T. Cap. - 3 Yr. Avg. 8.4%
Return On Equity 14%
Return On Equity - 3 Yr. Avg. 10%
Asset Turnover 1.8
Profitability Ratios
Gross Margin 17%
Gross Margin - 3 Yr. Avg. 17.2%
EBITDA Margin 9%
EBITDA Margin - 3 Yr. Avg. 8.2%
Operating Margin 4.8%
Oper. Margin - 3 Yr. Avg. 3.4%
Pre-Tax Margin 4.3%
Pre-Tax Margin - 3 Yr. Avg. 3.4%
Net Profit Margin 2.9%
Net Profit Margin - 3 Yr. Avg. 2.1%
Effective Tax Rate 32.5%
Eff/ Tax Rate - 3 Yr. Avg. 37.7%
Payout Ratio 7.5%

LKSD stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the LKSD stock intrinsic value calculation we used $3654 million for the last fiscal year's total revenue generated by LSC Communications. The default revenue input number comes from 2016 income statement of LSC 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 LKSD 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 8%, whose default value for LKSD is calculated based on our internal credit rating of LSC 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 LSC 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 LKSD stock the variable cost ratio is equal to 96.4%.

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 LKSD 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 3.5% for LSC Communications.

Corporate tax rate of 27% is the nominal tax rate for LSC 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 LKSD 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 LKSD are equal to 22%.

Life of production assets of 5.2 years is the average useful life of capital assets used in LSC 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 LKSD is equal to 9.8%. 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 - $240 million for LSC 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 34.778 million for LSC 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 LSC Communications at the current share price and the inputted number of shares is $0.6 billion.

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COMPANY NEWS

▶ LSC Communications Acquires Publishers Press   [Sep-07-17 06:30AM  Business Wire]
▶ LSC Communications Completes Acquisition of CREEL   [Aug-17-17 04:01PM  Business Wire]
▶ LSC Communications misses 2Q profit forecasts   [Aug-04-17 12:32AM  Associated Press]
▶ LSC Communications Acquires Fairrington Transportation   [Jul-31-17 06:30AM  Business Wire]
▶ LSC Communications Acquires CREEL Printing   [Jul-17-17 06:30AM  Business Wire]
▶ LSC Communications reports 1Q loss   [May-04-17 06:50AM  Associated Press]
Financial statements of LKSD
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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