Balan Nair, the CEO of telecommunications firm Liberty Latin America (Nasdaq: LILAK), simply used the phrase “madness” to explain his firm’s inventory worth.
Nair thinks the market is giving traders a present.
For these unfamiliar, Liberty Latin America provides cable and cellular providers to twenty totally different nations in Latin America and the Caribbean.
After digging into Liberty Latin America’s enterprise, I see clearly what CEO Nair arguing.
The market is neither appreciating Liberty Latin America’s capacity to generate free money movement nor appreciating the truth that its free money movement is projected to extend considerably over the following couple of years.
To be clear, free money movement is extra money left over from progress and operations. It may be used to scale back debt, pay dividends or repurchase shares, or it may be saved for future use.
Producing free money movement is principally the whole level of doing enterprise.
Liberty Latin America is guiding without cost money movement of $220 million for 2022.
With 240 million shares excellent, which means Liberty Latin America will generate $0.92 per share in free money movement this 12 months.
That’s spectacular for a inventory buying and selling at $6.15 (as I write).
However that’s simply this 12 months. Projected free money movement for the following couple of years appears even higher.
Liberty Latin America is at the moment digesting three separate acquisitions.
Mixed, the corporate has indicated that there’s $155 million price in synergies that will probably be realized from these transactions over the following two years.
Meaning this firm may see its yearly free money movement soar from 2022’s projected $220 million to $375 million by 2024.
That might be $1.56 price of free money movement per share on a inventory that’s at the moment buying and selling at simply $6.15…
In different phrases, a free money movement yield of 25% ($1.56 / $6.15 = 25%).
The final time that I noticed a free money movement yield this excessive from a stable, well-run firm was in October 2021, once I shined my gentle on Cenovus Vitality (NYSE: CVE). Cenovus Vitality has since extensively outperformed the market.
Liberty Latin America’s CEO is clearly sad with the place his inventory trades, and you may guess he received’t simply sit again and let the corporate endure from this low valuation.
As an alternative, he’ll exploit the discounted valuation to create worth for shareholders.
So long as the inventory continues to commerce cheaply, Liberty Latin America’s acknowledged plan is to make use of all of its free money movement to repurchase its personal shares at cut price ranges.
Over the previous 4 quarters, Liberty Latin America’s repurchases have accelerated because the inventory worth has come down and the valuation has improved.
When used appropriately like this, an aggressive share repurchase plan is a robust device for creating shareholder worth.
The longer Liberty Latin America’s share worth stays down, the extra worth Nair and his board of administrators can create.
Right this moment, The Worth Meter charges Liberty Latin America’s shares as “Barely Undervalued.”
The one purpose they aren’t rated “Extraordinarily Undervalued” is as a result of we nonetheless must see the corporate execute on the synergies it expects to ship over the following couple of years.
It has been a tricky 12 months within the monetary markets, however there’s worth to be discovered. Liberty Latin America is proof of that.
Valuation Ranking: Barely Undervalued
When you have a inventory whose valuation you’d like me to grade, depart the ticker within the feedback part.
You too can verify to see whether or not I’ve written about your favourite inventory lately. Simply click on on the magnifying glass on the higher proper a part of the Rich Retirement homepage, sort within the ticker image and hit enter.
Good investing,
Jody