Intrinsic value of K12 - LRN

Previous Close

$23.01

  Intrinsic Value

$65.27

stock screener

  Rating & Target

str. buy

+184%

Previous close

$23.01

 
Intrinsic value

$65.27

 
Up/down potential

+184%

 
Rating

str. buy

We calculate the intrinsic value of LRN 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 0001), $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 0.9

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  10.70
  10.13
  9.62
  9.16
  8.74
  8.37
  8.03
  7.73
  7.45
  7.21
  6.99
  6.79
  6.61
  6.45
  6.30
  6.17
  6.06
  5.95
  5.86
  5.77
  5.69
  5.62
  5.56
  5.51
  5.45
  5.41
  5.37
  5.33
  5.30
  5.27
Revenue, $m
  1,016
  1,119
  1,226
  1,339
  1,456
  1,578
  1,704
  1,836
  1,973
  2,115
  2,263
  2,416
  2,576
  2,742
  2,915
  3,095
  3,282
  3,478
  3,681
  3,894
  4,115
  4,347
  4,589
  4,841
  5,105
  5,381
  5,670
  5,973
  6,289
  6,620
Variable operating expenses, $m
  577
  633
  692
  753
  817
  884
  953
  1,025
  1,099
  1,177
  1,236
  1,320
  1,407
  1,498
  1,593
  1,691
  1,793
  1,900
  2,011
  2,127
  2,248
  2,375
  2,507
  2,645
  2,789
  2,940
  3,098
  3,263
  3,436
  3,617
Fixed operating expenses, $m
  385
  394
  402
  411
  420
  430
  439
  449
  459
  469
  479
  489
  500
  511
  523
  534
  546
  558
  570
  583
  595
  609
  622
  636
  650
  664
  678
  693
  709
  724
Total operating expenses, $m
  962
  1,027
  1,094
  1,164
  1,237
  1,314
  1,392
  1,474
  1,558
  1,646
  1,715
  1,809
  1,907
  2,009
  2,116
  2,225
  2,339
  2,458
  2,581
  2,710
  2,843
  2,984
  3,129
  3,281
  3,439
  3,604
  3,776
  3,956
  4,145
  4,341
Operating income, $m
  54
  92
  132
  174
  218
  264
  312
  362
  415
  469
  548
  607
  668
  733
  800
  870
  943
  1,020
  1,100
  1,184
  1,272
  1,364
  1,460
  1,561
  1,667
  1,778
  1,894
  2,016
  2,144
  2,279
EBITDA, $m
  106
  148
  191
  237
  284
  334
  386
  440
  496
  555
  616
  680
  747
  816
  889
  964
  1,043
  1,126
  1,212
  1,302
  1,397
  1,496
  1,599
  1,708
  1,822
  1,941
  2,066
  2,198
  2,336
  2,480
Interest expense (income), $m
  1
  1
  2
  3
  4
  5
  6
  7
  8
  9
  10
  11
  13
  14
  15
  17
  18
  19
  21
  23
  24
  26
  28
  30
  32
  34
  36
  38
  41
  43
  46
Earnings before tax, $m
  52
  90
  129
  170
  213
  259
  306
  355
  406
  459
  536
  594
  655
  718
  783
  852
  924
  999
  1,077
  1,160
  1,246
  1,336
  1,430
  1,529
  1,633
  1,741
  1,856
  1,975
  2,101
  2,233
Tax expense, $m
  14
  24
  35
  46
  58
  70
  82
  96
  110
  124
  145
  160
  177
  194
  212
  230
  249
  270
  291
  313
  336
  361
  386
  413
  441
  470
  501
  533
  567
  603
Net income, $m
  38
  66
  94
  124
  156
  189
  223
  259
  296
  335
  391
  434
  478
  524
  572
  622
  674
  729
  787
  846
  909
  975
  1,044
  1,116
  1,192
  1,271
  1,355
  1,442
  1,534
  1,630

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
  679
  748
  820
  895
  973
  1,054
  1,139
  1,227
  1,319
  1,414
  1,512
  1,615
  1,722
  1,833
  1,949
  2,069
  2,194
  2,325
  2,461
  2,603
  2,751
  2,906
  3,067
  3,236
  3,413
  3,597
  3,790
  3,992
  4,204
  4,425
Adjusted assets (=assets-cash), $m
  679
  748
  820
  895
  973
  1,054
  1,139
  1,227
  1,319
  1,414
  1,512
  1,615
  1,722
  1,833
  1,949
  2,069
  2,194
  2,325
  2,461
  2,603
  2,751
  2,906
  3,067
  3,236
  3,413
  3,597
  3,790
  3,992
  4,204
  4,425
Revenue / Adjusted assets
  1.496
  1.496
  1.495
  1.496
  1.496
  1.497
  1.496
  1.496
  1.496
  1.496
  1.497
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
  1.496
Average production assets, $m
  154
  170
  186
  203
  221
  240
  259
  279
  300
  321
  344
  367
  392
  417
  443
  470
  499
  529
  560
  592
  626
  661
  697
  736
  776
  818
  862
  908
  956
  1,006
Working capital, $m
  138
  152
  167
  182
  198
  215
  232
  250
  268
  288
  308
  329
  350
  373
  396
  421
  446
  473
  501
  530
  560
  591
  624
  658
  694
  732
  771
  812
  855
  900
Total debt, $m
  41
  57
  73
  90
  108
  127
  147
  167
  188
  210
  232
  256
  281
  306
  333
  360
  389
  419
  451
  483
  517
  553
  590
  629
  669
  712
  756
  803
  851
  902
Total liabilities, $m
  156
  172
  189
  206
  224
  243
  262
  282
  303
  325
  348
  371
  396
  422
  448
  476
  505
  535
  566
  599
  633
  668
  705
  744
  785
  827
  872
  918
  967
  1,018
Total equity, $m
  523
  576
  631
  689
  749
  812
  877
  945
  1,015
  1,089
  1,165
  1,244
  1,326
  1,411
  1,500
  1,593
  1,689
  1,790
  1,895
  2,004
  2,118
  2,237
  2,362
  2,492
  2,628
  2,770
  2,919
  3,074
  3,237
  3,408
Total liabilities and equity, $m
  679
  748
  820
  895
  973
  1,055
  1,139
  1,227
  1,318
  1,414
  1,513
  1,615
  1,722
  1,833
  1,948
  2,069
  2,194
  2,325
  2,461
  2,603
  2,751
  2,905
  3,067
  3,236
  3,413
  3,597
  3,791
  3,992
  4,204
  4,426
Debt-to-equity ratio
  0.080
  0.100
  0.120
  0.130
  0.140
  0.160
  0.170
  0.180
  0.190
  0.190
  0.200
  0.210
  0.210
  0.220
  0.220
  0.230
  0.230
  0.230
  0.240
  0.240
  0.240
  0.250
  0.250
  0.250
  0.250
  0.260
  0.260
  0.260
  0.260
  0.260
Adjusted equity ratio
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770
  0.770

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  38
  66
  94
  124
  156
  189
  223
  259
  296
  335
  391
  434
  478
  524
  572
  622
  674
  729
  787
  846
  909
  975
  1,044
  1,116
  1,192
  1,271
  1,355
  1,442
  1,534
  1,630
Depreciation, amort., depletion, $m
  53
  56
  59
  62
  66
  70
  74
  78
  82
  86
  69
  73
  78
  83
  89
  94
  100
  106
  112
  118
  125
  132
  139
  147
  155
  164
  172
  182
  191
  201
Funds from operations, $m
  91
  121
  153
  187
  222
  258
  297
  336
  378
  421
  460
  507
  556
  607
  660
  716
  774
  835
  898
  965
  1,034
  1,107
  1,183
  1,263
  1,347
  1,435
  1,527
  1,624
  1,725
  1,832
Change in working capital, $m
  13
  14
  15
  15
  16
  17
  17
  18
  19
  19
  20
  21
  22
  23
  24
  24
  25
  27
  28
  29
  30
  31
  33
  34
  36
  38
  39
  41
  43
  45
Cash from operations, $m
  78
  107
  139
  172
  206
  242
  279
  318
  359
  402
  440
  486
  534
  585
  637
  692
  749
  808
  871
  936
  1,004
  1,076
  1,150
  1,229
  1,311
  1,397
  1,488
  1,582
  1,682
  1,786
Maintenance CAPEX, $m
  -28
  -31
  -34
  -37
  -41
  -44
  -48
  -52
  -56
  -60
  -64
  -69
  -73
  -78
  -83
  -89
  -94
  -100
  -106
  -112
  -118
  -125
  -132
  -139
  -147
  -155
  -164
  -172
  -182
  -191
New CAPEX, $m
  -15
  -16
  -16
  -17
  -18
  -19
  -19
  -20
  -21
  -22
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -30
  -31
  -32
  -34
  -35
  -37
  -38
  -40
  -42
  -44
  -46
  -48
  -50
Cash from investing activities, $m
  -43
  -47
  -50
  -54
  -59
  -63
  -67
  -72
  -77
  -82
  -86
  -92
  -97
  -103
  -109
  -116
  -122
  -130
  -137
  -144
  -152
  -160
  -169
  -177
  -187
  -197
  -208
  -218
  -230
  -241
Free cash flow, $m
  35
  61
  88
  117
  147
  179
  212
  247
  283
  320
  353
  394
  437
  481
  527
  576
  626
  679
  734
  792
  852
  915
  982
  1,051
  1,124
  1,200
  1,280
  1,364
  1,452
  1,545
Issuance/(repayment) of debt, $m
  15
  16
  17
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  29
  30
  31
  33
  34
  36
  37
  39
  41
  42
  44
  46
  49
  51
Issuance/(repurchase) of shares, $m
  12
  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  
  27
  16
  17
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  29
  30
  31
  33
  34
  36
  37
  39
  41
  42
  44
  46
  49
  51
Total cash flow (excl. dividends), $m
  61
  77
  105
  134
  165
  198
  232
  267
  304
  342
  376
  418
  461
  507
  554
  603
  655
  709
  765
  824
  886
  951
  1,019
  1,090
  1,164
  1,243
  1,325
  1,411
  1,501
  1,596
Retained Cash Flow (-), $m
  -51
  -53
  -55
  -58
  -60
  -63
  -65
  -68
  -70
  -73
  -76
  -79
  -82
  -86
  -89
  -93
  -96
  -101
  -105
  -109
  -114
  -119
  -124
  -130
  -136
  -142
  -149
  -156
  -163
  -171
Prev. year cash balance distribution, $m
  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 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
  126
  24
  49
  77
  105
  135
  166
  199
  233
  269
  300
  339
  379
  421
  465
  511
  558
  608
  661
  715
  772
  832
  894
  960
  1,028
  1,100
  1,176
  1,255
  1,338
  1,425
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  121
  22
  43
  63
  82
  98
  112
  124
  134
  141
  142
  145
  144
  141
  136
  130
  122
  112
  102
  91
  80
  69
  59
  49
  40
  32
  25
  19
  15
  11
Current shareholders' claim on cash, %
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3

K12 Inc. (K12) is a technology-based education company. The Company offers curriculum, software systems and educational services designed to facilitate individualized learning for students in kindergarten through 12th grade (K-12). It provides a continuum of technology-based educational products and solutions to public school districts, public schools, virtual charter schools, private schools and families. The Company offers a set of products and services primarily to three lines of business, which include Managed Public School Programs, which consists of virtual and blended schools; Institutional business, which includes educational products and services sold to school districts, public schools and other educational institutions, and Private Pay Schools and Other, which includes private schools, including international, for which it charges student tuition and direct consumer sales. It sells individual online courses and supplemental educational products directly to families.

FINANCIAL RATIOS  of  K12 (LRN)

Valuation Ratios
P/E Ratio 0
Price to Sales 1.1
Price to Book 1.6
Price to Tangible Book
Price to Cash Flow 10.6
Price to Free Cash Flow 22.9
Growth Rates
Sales Growth Rate 1.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -23.8%
Cap. Spend. - 3 Yr. Gr. Rate -0.4%
Financial Strength
Quick Ratio 19
Current Ratio 0.1
LT Debt to Equity 1.7%
Total Debt to Equity 3.8%
Interest Coverage 6
Management Effectiveness
Return On Assets 0%
Ret/ On Assets - 3 Yr. Avg. 1%
Return On Total Capital 0%
Ret/ On T. Cap. - 3 Yr. Avg. 1.2%
Return On Equity 0%
Return On Equity - 3 Yr. Avg. 1.2%
Asset Turnover 1.2
Profitability Ratios
Gross Margin 37.2%
Gross Margin - 3 Yr. Avg. 36.8%
EBITDA Margin 9%
EBITDA Margin - 3 Yr. Avg. 9.5%
Operating Margin 0.4%
Oper. Margin - 3 Yr. Avg. 1.3%
Pre-Tax Margin 0.6%
Pre-Tax Margin - 3 Yr. Avg. 1.2%
Net Profit Margin 0%
Net Profit Margin - 3 Yr. Avg. 0.7%
Effective Tax Rate 100%
Eff/ Tax Rate - 3 Yr. Avg. 56.9%
Payout Ratio 0%

LRN stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the LRN stock intrinsic value calculation we used $917.734 million for the last fiscal year's total revenue generated by K12. The default revenue input number comes from 0001 income statement of K12. 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 LRN stock valuation model: a) initial revenue growth rate of 10.7% 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 4.3%, whose default value for LRN is calculated based on our internal credit rating of K12, 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 K12.
    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 LRN stock the variable cost ratio is equal to 57%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $377 million in the base year in the intrinsic value calculation for LRN 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 5.4% for K12.

Corporate tax rate of 27% is the nominal tax rate for K12. 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 LRN 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 LRN are equal to 15.2%.

Life of production assets of 3.3 years is the average useful life of capital assets used in K12 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 LRN is equal to 13.6%. 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 - $587.189 million for K12 - 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 39.573 million for K12 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 K12 at the current share price and the inputted number of shares is $0.9 billion.

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COMPANY NEWS

▶ Why K12 Inc. Stock Skyrocketed Wednesday   [Oct-24-18 12:11PM  Motley Fool]
▶ K12: Fiscal 1Q Earnings Snapshot   [Oct-23-18 04:36PM  Associated Press]
▶ Should K12 Incs (NYSE:LRN) Recent Earnings Worry You?   [Sep-14-18 02:20PM  Simply Wall St.]
▶ Wyoming Virtual Set to Begin 2018-19 School Year   [Aug-15-18 01:00PM  Business Wire]
▶ Nevada Virtual Academy Begins 10th School Year on August 13   [Aug-08-18 01:00PM  Business Wire]
▶ K12: Fiscal 4Q Earnings Snapshot   [Aug-07-18 07:47PM  Associated Press]
▶ Arizona Virtual Academy Begins 15th School Year on August 8   [Aug-01-18 02:07PM  Business Wire]
▶ Insight Schools of California to Celebrate Class of 2018   [Jun-18-18 01:35PM  Business Wire]

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