Intrinsic value of Lumos Networks - LMOS

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$17.85

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$17.85

 
Intrinsic value

$11.03

 
Up/down potential

-38%

 
Rating

sell

 
Value-price divergence* premium content

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

We calculate the intrinsic value of LMOS 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, %
  1.47
  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
  207
  211
  216
  222
  228
  235
  242
  251
  259
  269
  279
  290
  302
  315
  328
  342
  357
  373
  390
  408
  426
  446
  467
  489
  512
  537
  562
  589
  618
  648
  679
Variable operating expenses, $m
 
  173
  177
  181
  186
  191
  197
  204
  210
  218
  226
  224
  234
  243
  254
  264
  276
  288
  301
  315
  329
  345
  361
  378
  396
  415
  434
  455
  477
  500
  525
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
  177
  173
  177
  181
  186
  191
  197
  204
  210
  218
  226
  224
  234
  243
  254
  264
  276
  288
  301
  315
  329
  345
  361
  378
  396
  415
  434
  455
  477
  500
  525
Operating income, $m
  30
  38
  39
  40
  42
  43
  45
  47
  49
  51
  54
  66
  69
  72
  75
  78
  81
  85
  89
  93
  97
  101
  106
  111
  116
  122
  128
  134
  140
  147
  154
EBITDA, $m
  82
  93
  95
  97
  100
  103
  106
  110
  114
  118
  122
  127
  132
  138
  144
  150
  157
  163
  171
  179
  187
  195
  205
  214
  224
  235
  246
  258
  271
  284
  298
Interest expense (income), $m
  0
  16
  16
  17
  17
  18
  19
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
  31
  33
  35
  36
  38
  40
  42
  45
  47
  50
  52
  55
  58
  61
Earnings before tax, $m
  2
  22
  23
  24
  24
  25
  26
  27
  29
  30
  31
  43
  44
  46
  48
  50
  52
  54
  56
  58
  61
  63
  66
  69
  72
  75
  78
  82
  85
  89
  93
Tax expense, $m
  2
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  12
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
Net income, $m
  -1
  16
  17
  17
  18
  18
  19
  20
  21
  22
  23
  31
  32
  34
  35
  36
  38
  39
  41
  42
  44
  46
  48
  50
  52
  55
  57
  60
  62
  65
  68

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  72
  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
  753
  695
  711
  729
  749
  772
  797
  824
  853
  885
  919
  955
  994
  1,035
  1,079
  1,126
  1,175
  1,227
  1,283
  1,341
  1,403
  1,468
  1,536
  1,609
  1,685
  1,765
  1,849
  1,938
  2,032
  2,130
  2,234
Adjusted assets (=assets-cash), $m
  681
  695
  711
  729
  749
  772
  797
  824
  853
  885
  919
  955
  994
  1,035
  1,079
  1,126
  1,175
  1,227
  1,283
  1,341
  1,403
  1,468
  1,536
  1,609
  1,685
  1,765
  1,849
  1,938
  2,032
  2,130
  2,234
Revenue / Adjusted assets
  0.304
  0.304
  0.304
  0.305
  0.304
  0.304
  0.304
  0.305
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
  0.304
Average production assets, $m
  528
  539
  551
  565
  581
  599
  618
  639
  662
  686
  713
  741
  771
  803
  837
  873
  911
  952
  995
  1,040
  1,088
  1,138
  1,191
  1,247
  1,306
  1,369
  1,434
  1,503
  1,576
  1,652
  1,732
Working capital, $m
  54
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
Total debt, $m
  468
  466
  480
  496
  515
  535
  557
  581
  607
  635
  665
  697
  732
  768
  807
  849
  892
  939
  988
  1,040
  1,094
  1,152
  1,213
  1,277
  1,344
  1,415
  1,490
  1,569
  1,652
  1,739
  1,831
Total liabilities, $m
  618
  616
  630
  646
  665
  685
  707
  731
  757
  785
  815
  847
  882
  918
  957
  999
  1,042
  1,089
  1,138
  1,190
  1,244
  1,302
  1,363
  1,427
  1,494
  1,565
  1,640
  1,719
  1,802
  1,889
  1,981
Total equity, $m
  135
  78
  80
  82
  85
  87
  90
  93
  96
  100
  104
  108
  112
  117
  122
  127
  133
  139
  145
  152
  159
  166
  174
  182
  190
  199
  209
  219
  230
  241
  252
Total liabilities and equity, $m
  753
  694
  710
  728
  750
  772
  797
  824
  853
  885
  919
  955
  994
  1,035
  1,079
  1,126
  1,175
  1,228
  1,283
  1,342
  1,403
  1,468
  1,537
  1,609
  1,684
  1,764
  1,849
  1,938
  2,032
  2,130
  2,233
Debt-to-equity ratio
  3.467
  5.940
  5.980
  6.030
  6.080
  6.130
  6.180
  6.240
  6.290
  6.350
  6.410
  6.460
  6.510
  6.570
  6.620
  6.670
  6.720
  6.770
  6.810
  6.860
  6.900
  6.950
  6.990
  7.020
  7.060
  7.100
  7.130
  7.160
  7.200
  7.230
  7.260
Adjusted equity ratio
  0.093
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -1
  16
  17
  17
  18
  18
  19
  20
  21
  22
  23
  31
  32
  34
  35
  36
  38
  39
  41
  42
  44
  46
  48
  50
  52
  55
  57
  60
  62
  65
  68
Depreciation, amort., depletion, $m
  52
  55
  56
  57
  58
  59
  61
  63
  65
  67
  69
  61
  64
  66
  69
  72
  75
  79
  82
  86
  90
  94
  98
  103
  108
  113
  119
  124
  130
  137
  143
Funds from operations, $m
  61
  71
  72
  74
  76
  78
  80
  83
  86
  89
  92
  92
  96
  100
  104
  108
  113
  118
  123
  128
  134
  140
  147
  153
  160
  168
  176
  184
  193
  202
  211
Change in working capital, $m
  -4
  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
  -1
  -1
  -1
  -1
Cash from operations, $m
  65
  89
  72
  74
  76
  78
  80
  83
  86
  89
  92
  93
  96
  100
  104
  109
  113
  118
  123
  129
  134
  141
  147
  154
  161
  168
  176
  184
  193
  202
  212
Maintenance CAPEX, $m
  0
  -44
  -45
  -46
  -47
  -48
  -49
  -51
  -53
  -55
  -57
  -59
  -61
  -64
  -66
  -69
  -72
  -75
  -79
  -82
  -86
  -90
  -94
  -98
  -103
  -108
  -113
  -119
  -124
  -130
  -137
New CAPEX, $m
  -84
  -11
  -12
  -14
  -16
  -18
  -19
  -21
  -23
  -25
  -26
  -28
  -30
  -32
  -34
  -36
  -38
  -41
  -43
  -45
  -48
  -50
  -53
  -56
  -59
  -62
  -65
  -69
  -73
  -76
  -80
Cash from investing activities, $m
  -33
  -55
  -57
  -60
  -63
  -66
  -68
  -72
  -76
  -80
  -83
  -87
  -91
  -96
  -100
  -105
  -110
  -116
  -122
  -127
  -134
  -140
  -147
  -154
  -162
  -170
  -178
  -188
  -197
  -206
  -217
Free cash flow, $m
  32
  34
  15
  14
  13
  12
  12
  11
  10
  10
  9
  6
  5
  4
  4
  3
  3
  2
  2
  1
  1
  0
  0
  -1
  -1
  -2
  -2
  -3
  -4
  -4
  -5
Issuance/(repayment) of debt, $m
  -11
  12
  14
  16
  18
  20
  22
  24
  26
  28
  30
  32
  34
  37
  39
  41
  44
  46
  49
  52
  55
  58
  61
  64
  68
  71
  75
  79
  83
  87
  92
Issuance/(repurchase) of shares, $m
  -1
  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  
  -12
  12
  14
  16
  18
  20
  22
  24
  26
  28
  30
  32
  34
  37
  39
  41
  44
  46
  49
  52
  55
  58
  61
  64
  68
  71
  75
  79
  83
  87
  92
Total cash flow (excl. dividends), $m
  20
  47
  30
  31
  32
  33
  34
  35
  36
  38
  39
  38
  39
  41
  43
  45
  47
  49
  51
  53
  55
  58
  61
  63
  66
  69
  72
  76
  79
  83
  87
Retained Cash Flow (-), $m
  -4
  -1
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
Prev. year cash balance distribution, $m
 
  58
  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
 
  103
  28
  28
  29
  30
  31
  32
  33
  34
  35
  34
  35
  36
  38
  39
  41
  43
  44
  46
  48
  51
  53
  55
  58
  60
  63
  66
  69
  72
  75
Discount rate, %
 
  9.70
  10.19
  10.69
  11.23
  11.79
  12.38
  13.00
  13.65
  14.33
  15.05
  15.80
  16.59
  17.42
  18.29
  19.21
  20.17
  21.17
  22.23
  23.34
  24.51
  25.74
  27.02
  28.38
  29.79
  31.28
  32.85
  34.49
  36.21
  38.03
  39.93
PV of cash for distribution, $m
 
  94
  23
  21
  19
  17
  15
  14
  12
  10
  9
  7
  6
  5
  4
  3
  2
  2
  1
  1
  1
  0
  0
  0
  0
  0
  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

Lumos Networks Corp., through its subsidiaries, provides fiber-based bandwidth infrastructure and service in the Mid-Atlantic region. It operates in three segments: Data, Residential and Small Business, and RLEC Access. The company provides data services, such as multiprotocol label switching based Ethernet, metro Ethernet, fiber to the cell site wireless backhaul, private line service and wavelength transport services, and dedicated Internet access, as well as dark fiber and data center/collocation services to carriers and enterprise customers, including healthcare providers, state and local government agencies, financial institutions, educational institutions, and other enterprises. It also offers fiber-to-the-premise broadband XL and DSL Internet, voice, video, and IP services to residential and small business customers. In addition, the company provides voice services, such as local lines, primary rate interface, long distance, toll and directory advertising, and other voice services. Further, it offers carrier customers with access to its network, which primarily includes switched access services. As of March 7, 2016, it had a fiber network of 8,607 fiber route miles and approximately 384,000 total fiber strand miles connecting 1,099 fiber to the cell sites, 1,440 total FTTC connections, 34 data centers, 1,732 on-net buildings, and approximately 2,800 total on-net locations. The company is headquartered in Waynesboro, Virginia.

FINANCIAL RATIOS  of  Lumos Networks (LMOS)

Valuation Ratios
P/E Ratio -421.4
Price to Sales 2
Price to Book 3.1
Price to Tangible Book
Price to Cash Flow 6.5
Price to Free Cash Flow -22.2
Growth Rates
Sales Growth Rate 1.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -27.6%
Cap. Spend. - 3 Yr. Gr. Rate 4.3%
Financial Strength
Quick Ratio 5
Current Ratio 0
LT Debt to Equity 336.3%
Total Debt to Equity 346.7%
Interest Coverage 0
Management Effectiveness
Return On Assets -0.1%
Ret/ On Assets - 3 Yr. Avg. 1.7%
Return On Total Capital -0.2%
Ret/ On T. Cap. - 3 Yr. Avg. 2.2%
Return On Equity -0.8%
Return On Equity - 3 Yr. Avg. 10.9%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 81.2%
Gross Margin - 3 Yr. Avg. 80.7%
EBITDA Margin 26.1%
EBITDA Margin - 3 Yr. Avg. 32.7%
Operating Margin 14.5%
Oper. Margin - 3 Yr. Avg. 19%
Pre-Tax Margin 1%
Pre-Tax Margin - 3 Yr. Avg. 9.1%
Net Profit Margin -0.5%
Net Profit Margin - 3 Yr. Avg. 5.1%
Effective Tax Rate 100%
Eff/ Tax Rate - 3 Yr. Avg. 60%
Payout Ratio 0%

LMOS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the LMOS stock intrinsic value calculation we used $207 million for the last fiscal year's total revenue generated by Lumos Networks. The default revenue input number comes from 2016 income statement of Lumos Networks. 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 LMOS 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 9.7%, whose default value for LMOS is calculated based on our internal credit rating of Lumos Networks, 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 Lumos Networks.
    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 LMOS stock the variable cost ratio is equal to 82.1%.

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 LMOS 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 Lumos Networks.

Corporate tax rate of 27% is the nominal tax rate for Lumos Networks. 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 LMOS 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 LMOS are equal to 255.1%.

Life of production assets of 12.1 years is the average useful life of capital assets used in Lumos Networks 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 LMOS is equal to -1.9%. 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 - $135 million for Lumos Networks - 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 23.98 million for Lumos Networks 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 Lumos Networks at the current share price and the inputted number of shares is $0.4 billion.


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COMPANY NEWS

▶ [$$] EQT to Buy Telecommunications Company Lumos Networks   [01:39PM  at The Wall Street Journal]
▶ Why Shares of Lumos Networks Surged Today   [12:18PM  at Motley Fool]
▶ Here is What Hedge Funds Think About Lumos Networks Corp (LMOS)   [Dec-14-16 01:24AM  at Insider Monkey]
▶ Lumos Networks Joins Equinix Cloud Exchange   [07:15AM  Business Wire]
▶ Lumos Introduces Express Cloud Access Service   [Apr-28-16 06:00AM  Business Wire]
Stock chart of LMOS Financial statements of LMOS
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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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