Calculating The Fair Value Of Livent Corporation (NYSE:LTHM)
Key Insights
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The projected fair value for Livent is US$19.78 based on 2 Stage Free Cash Flow to Equity
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With US$17.48 share price, Livent appears to be trading close to its estimated fair value
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Our fair value estimate is 21% lower than Livent's analyst price target of US$25.10
Does the December share price for Livent Corporation (NYSE:LTHM) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for Livent
The Method
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
| Levered FCF ($, Millions) | -US$15.2m | US$62.0m | US$116.1m | US$146.1m | US$168.6m | US$187.9m | US$204.2m | US$218.0m | US$229.7m | US$239.9m |
| Growth Rate Estimate Source | Analyst x9 | Analyst x6 | Analyst x2 | Analyst x2 | Est @ 15.42% | Est @ 11.46% | Est @ 8.69% | Est @ 6.75% | Est @ 5.39% | Est @ 4.44% |
| Present Value ($, Millions) Discounted @ 7.1% | -US$14.2 | US$54.1 | US$94.6 | US$111 | US$120 | US$125 | US$127 | US$126 | US$124 | US$121 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$989m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.1%.
