Intrinsic value of LSC Communications - LKSD

Previous Close

$14.67

  Intrinsic Value

$28.82

stock screener

  Rating & Target

str. buy

+96%

Previous close

$14.67

 
Intrinsic value

$28.82

 
Up/down potential

+96%

 
Rating

str. buy

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 2017), $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 0.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  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
  3,675
  3,760
  3,856
  3,965
  4,085
  4,217
  4,360
  4,516
  4,683
  4,863
  5,055
  5,260
  5,479
  5,711
  5,957
  6,219
  6,495
  6,787
  7,096
  7,422
  7,766
  8,129
  8,511
  8,914
  9,339
  9,785
  10,256
  10,751
  11,271
  11,819
Variable operating expenses, $m
  3,498
  3,578
  3,669
  3,772
  3,886
  4,010
  4,146
  4,293
  4,451
  4,621
  4,779
  4,973
  5,179
  5,399
  5,631
  5,878
  6,140
  6,416
  6,708
  7,016
  7,341
  7,684
  8,046
  8,426
  8,828
  9,250
  9,695
  10,162
  10,654
  11,172
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
  3,498
  3,578
  3,669
  3,772
  3,886
  4,010
  4,146
  4,293
  4,451
  4,621
  4,779
  4,973
  5,179
  5,399
  5,631
  5,878
  6,140
  6,416
  6,708
  7,016
  7,341
  7,684
  8,046
  8,426
  8,828
  9,250
  9,695
  10,162
  10,654
  11,172
Operating income, $m
  177
  182
  187
  193
  199
  207
  214
  223
  232
  242
  277
  288
  300
  312
  326
  340
  355
  371
  388
  406
  425
  445
  466
  488
  511
  535
  561
  588
  617
  647
EBITDA, $m
  285
  291
  299
  307
  317
  327
  338
  350
  363
  377
  392
  408
  425
  443
  462
  482
  503
  526
  550
  575
  602
  630
  660
  691
  724
  759
  795
  833
  874
  916
Interest expense (income), $m
  0
  73
  76
  80
  84
  89
  94
  100
  106
  113
  120
  128
  137
  145
  155
  165
  176
  187
  199
  212
  226
  240
  255
  271
  287
  305
  323
  343
  363
  385
  408
Earnings before tax, $m
  104
  105
  107
  109
  110
  112
  114
  117
  119
  122
  148
  151
  154
  157
  161
  164
  168
  172
  176
  181
  185
  190
  195
  200
  206
  212
  218
  225
  232
  239
Tax expense, $m
  28
  28
  29
  29
  30
  30
  31
  31
  32
  33
  40
  41
  42
  43
  43
  44
  45
  46
  48
  49
  50
  51
  53
  54
  56
  57
  59
  61
  63
  65
Net income, $m
  76
  77
  78
  79
  81
  82
  84
  85
  87
  89
  108
  110
  113
  115
  117
  120
  123
  126
  129
  132
  135
  139
  142
  146
  150
  155
  159
  164
  169
  174

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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 assets, $m
  2,054
  2,102
  2,156
  2,216
  2,283
  2,357
  2,437
  2,524
  2,618
  2,718
  2,826
  2,940
  3,063
  3,192
  3,330
  3,476
  3,630
  3,794
  3,966
  4,149
  4,341
  4,544
  4,758
  4,983
  5,220
  5,470
  5,733
  6,009
  6,300
  6,606
Adjusted assets (=assets-cash), $m
  2,054
  2,102
  2,156
  2,216
  2,283
  2,357
  2,437
  2,524
  2,618
  2,718
  2,826
  2,940
  3,063
  3,192
  3,330
  3,476
  3,630
  3,794
  3,966
  4,149
  4,341
  4,544
  4,758
  4,983
  5,220
  5,470
  5,733
  6,009
  6,300
  6,606
Revenue / Adjusted assets
  1.789
  1.789
  1.788
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
  1.789
Average production assets, $m
  838
  857
  879
  904
  931
  961
  994
  1,030
  1,068
  1,109
  1,153
  1,199
  1,249
  1,302
  1,358
  1,418
  1,481
  1,547
  1,618
  1,692
  1,771
  1,853
  1,941
  2,032
  2,129
  2,231
  2,338
  2,451
  2,570
  2,695
Working capital, $m
  -173
  -177
  -181
  -186
  -192
  -198
  -205
  -212
  -220
  -229
  -238
  -247
  -258
  -268
  -280
  -292
  -305
  -319
  -334
  -349
  -365
  -382
  -400
  -419
  -439
  -460
  -482
  -505
  -530
  -555
Total debt, $m
  858
  899
  946
  1,000
  1,058
  1,123
  1,194
  1,270
  1,352
  1,440
  1,534
  1,635
  1,742
  1,856
  1,976
  2,104
  2,240
  2,383
  2,535
  2,694
  2,863
  3,041
  3,228
  3,426
  3,634
  3,853
  4,084
  4,326
  4,581
  4,850
Total liabilities, $m
  1,802
  1,843
  1,890
  1,944
  2,002
  2,067
  2,138
  2,214
  2,296
  2,384
  2,478
  2,579
  2,686
  2,800
  2,920
  3,048
  3,184
  3,327
  3,479
  3,638
  3,807
  3,985
  4,172
  4,370
  4,578
  4,797
  5,028
  5,270
  5,525
  5,794
Total equity, $m
  253
  258
  265
  273
  281
  290
  300
  310
  322
  334
  348
  362
  377
  393
  410
  428
  447
  467
  488
  510
  534
  559
  585
  613
  642
  673
  705
  739
  775
  813
Total liabilities and equity, $m
  2,055
  2,101
  2,155
  2,217
  2,283
  2,357
  2,438
  2,524
  2,618
  2,718
  2,826
  2,941
  3,063
  3,193
  3,330
  3,476
  3,631
  3,794
  3,967
  4,148
  4,341
  4,544
  4,757
  4,983
  5,220
  5,470
  5,733
  6,009
  6,300
  6,607
Debt-to-equity ratio
  3.390
  3.480
  3.570
  3.670
  3.770
  3.870
  3.980
  4.090
  4.200
  4.310
  4.410
  4.520
  4.620
  4.730
  4.830
  4.920
  5.020
  5.110
  5.200
  5.280
  5.360
  5.440
  5.520
  5.590
  5.660
  5.730
  5.790
  5.850
  5.910
  5.970
Adjusted equity ratio
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  76
  77
  78
  79
  81
  82
  84
  85
  87
  89
  108
  110
  113
  115
  117
  120
  123
  126
  129
  132
  135
  139
  142
  146
  150
  155
  159
  164
  169
  174
Depreciation, amort., depletion, $m
  108
  110
  112
  115
  117
  120
  124
  127
  131
  135
  115
  120
  125
  130
  136
  142
  148
  155
  162
  169
  177
  185
  194
  203
  213
  223
  234
  245
  257
  269
Funds from operations, $m
  184
  187
  190
  194
  198
  202
  207
  212
  218
  224
  224
  230
  238
  245
  253
  262
  271
  280
  290
  301
  312
  324
  336
  350
  363
  378
  393
  409
  426
  444
Change in working capital, $m
  -3
  -4
  -5
  -5
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -26
Cash from operations, $m
  187
  191
  195
  199
  204
  209
  214
  220
  226
  232
  233
  240
  248
  256
  265
  274
  284
  294
  305
  316
  328
  341
  354
  368
  383
  399
  415
  432
  451
  470
Maintenance CAPEX, $m
  -82
  -84
  -86
  -88
  -90
  -93
  -96
  -99
  -103
  -107
  -111
  -115
  -120
  -125
  -130
  -136
  -142
  -148
  -155
  -162
  -169
  -177
  -185
  -194
  -203
  -213
  -223
  -234
  -245
  -257
New CAPEX, $m
  -17
  -19
  -22
  -25
  -27
  -30
  -33
  -35
  -38
  -41
  -44
  -47
  -50
  -53
  -56
  -60
  -63
  -67
  -70
  -74
  -78
  -83
  -87
  -92
  -97
  -102
  -107
  -113
  -119
  -125
Cash from investing activities, $m
  -99
  -103
  -108
  -113
  -117
  -123
  -129
  -134
  -141
  -148
  -155
  -162
  -170
  -178
  -186
  -196
  -205
  -215
  -225
  -236
  -247
  -260
  -272
  -286
  -300
  -315
  -330
  -347
  -364
  -382
Free cash flow, $m
  88
  88
  87
  86
  86
  85
  85
  85
  85
  85
  78
  78
  78
  78
  78
  79
  79
  79
  80
  80
  81
  81
  82
  83
  83
  84
  85
  86
  87
  88
Issuance/(repayment) of debt, $m
  36
  41
  47
  53
  59
  65
  70
  76
  82
  88
  94
  101
  107
  114
  121
  128
  135
  143
  151
  160
  169
  178
  187
  198
  208
  219
  231
  243
  255
  268
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
Cash from financing (excl. dividends), $m  
  36
  41
  47
  53
  59
  65
  70
  76
  82
  88
  94
  101
  107
  114
  121
  128
  135
  143
  151
  160
  169
  178
  187
  198
  208
  219
  231
  243
  255
  268
Total cash flow (excl. dividends), $m
  123
  129
  134
  139
  145
  150
  155
  161
  167
  173
  172
  179
  185
  192
  199
  207
  214
  223
  231
  240
  249
  259
  269
  280
  291
  303
  315
  328
  342
  356
Retained Cash Flow (-), $m
  -5
  -6
  -7
  -7
  -8
  -9
  -10
  -11
  -12
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -24
  -25
  -26
  -28
  -29
  -31
  -32
  -34
  -36
  -38
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
  14
  15
  15
  15
  16
  16
  17
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  30
  31
  33
  34
  36
  37
  39
  41
  43
  45
Cash available for distribution, $m
  119
  123
  128
  132
  136
  141
  146
  150
  155
  160
  159
  164
  170
  176
  182
  189
  195
  203
  210
  218
  226
  234
  243
  252
  262
  272
  283
  294
  306
  319
Discount rate, %
  8.50
  8.93
  9.37
  9.84
  10.33
  10.85
  11.39
  11.96
  12.56
  13.19
  13.85
  14.54
  15.26
  16.03
  16.83
  17.67
  18.55
  19.48
  20.46
  21.48
  22.55
  23.68
  24.86
  26.11
  27.41
  28.78
  30.22
  31.73
  33.32
  34.99
PV of cash for distribution, $m
  109
  104
  98
  91
  83
  76
  68
  61
  54
  46
  38
  32
  27
  22
  18
  14
  11
  8
  6
  4
  3
  2
  1
  1
  1
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  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 4.5
Price to Sales 0.1
Price to Book 2
Price to Tangible Book
Price to Cash Flow 2.1
Price to Free Cash Flow 2.6
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 $3603 million for the last fiscal year's total revenue generated by LSC Communications. The default revenue input number comes from 2017 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 8.5%, 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 95.2%.

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 8.9% 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 0.4%.

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 22.8%.

Life of production assets of 10 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 -4.7%. 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 - $248 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 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 $0.5 billion.

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COMPANY NEWS

▶ LSC Communications: 1Q Earnings Snapshot   [May-03-18 06:56AM  Associated Press]
▶ LSC Communications Acquires TriLiteral LLC   [Apr-03-18 06:30AM  Business Wire]
▶ LSC Communications reports 4Q loss   [Feb-22-18 07:03AM  Associated Press]
▶ [$$] LSC Communications Acquires Gores-Backed Clark Group   [Nov-29-17 01:20PM  The Wall Street Journal]
▶ LSC Communications Acquires The Clark Group   [06:30AM  Business Wire]
▶ LSC Communications reports 3Q loss   [06:44AM  Associated Press]
▶ 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]
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