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I know you're shying away from using existing Motley Fool picks for your own portfolio, but I thought I'd bring up LQDT. I recently did a "deep dive" on LQDT prior to picking up a second position: http://boards.fool.com/1081/lqdt-quotdeep-divequot-29164413....

Here's a piece from my valuation analysis:

For fun, I tried to reverse engineer what expectations the market is pricing in to the current stock price. I had to check my math again as my results appear hard to believe, but using 2010 FCF of $28 million, the company needs to grow FCF at only 1.83% per year to hit $15 per share. That’s it. Short-term, long-term, terminal growth rate, whatever – only 1.83% annually. If the company grows cash flow at even 5% from here on out I get a valuation of $22.

I used a lower hurdle rate than you do (12% I think) but I doubt upping the discount rate to 15% would change much of anything. Anyway, thought you might find it interesting, though given that you're already an SA analysis, you've probably already looked LQDT. Even if you don't want to use it for MUE, I'd be curious to learn what your model concludes about what growth rates are currently priced in.

Thanks!
Fletch
Long LQDT
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Hi Fletch,

Not getting the same numbers you are. Not sure why.

Liquidity Services (LQDT)

Latest stock price $16.73

Predicted price $16.73

Discount rate 12.0%
TTM Earnings $31
Growth 1-5 11.1%
Growth 5-10 5.5%
Growth term 0.0%
# shares 27.1

At 15% discount, rates much higher (16.4% / 8.2% / 0%).

As a check, I've got (rounding to whole numbers) $34 M in year 1 (discounted to $30), $55 M in Yr 6 (discounted $28), and $564 M in Terminal (discounted $181).

Cheers,
Jim
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Thanks Jim. I'll check my model and see if I can figure out where I may have gone wrong. Though thinking about it now, I made that post on March 11 when the stock opened at $15.25. Today's price is up almost 10% since then, so maybe that's part of it.

Fletch
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Hi Jim,

This is the quick model I ran for LQDT deep dive. At an 11% discount rate, I backed into a 2% growth rate to calculate a value of roughly $15 per share (about what the stock was trading for at the time). However, if I drop the terminal value to zero and up the discount rate to 15%, my value per share dropps to $11. Big difference. Also, I admit to not yet having completed question #5 of this week's homework via my model, so it's always possible my math is wrong as well!

Also, for MUE analysis, are you including net cash in the computations, or are you looking purely at the baked-in growth rates on TTM FCF?



Years 1-5 2.00%
Years 6-10 2.00%
Terminal Value 2.00%
Discount rate 11.00%
--------------

Baseline 28,217
-
Year 1 28,781
Year 2 29,357
Year 3 29,944
Year 4 30,543
Year 5 31,154
Year 6 31,777
Year 7 32,412
Year 8 33,061
Year 9 33,722
Year 10 34,396
--------------
Nominal 343,365
--------------
Discounted 182,502
Terminal 137,290
Cash on BS 76,783
--------------
396,576

Less: Total Debt 0
Less: PV of Operating Leases 0
Less: Value of O/S Options 0
--------------
Cash Equity Value 396,576
Shares O/S 26,000
--------------
Value per Share $15.35
--------------
-
-


Thanks,
Fletch
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Also, for MUE analysis, are you including net cash in the computations, or are you looking purely at the baked-in growth rates on TTM FCF?

Hi Fletch,

Thanks for sharing the math. The math you're running to calculate cash equity value is different from what I'm doing. You're calling the FCF you calculate free cash flow to the firm (FCFF). When discounted and summed, this values the enterprise value of the firm. Adding cash and subtracting debt then converts EV to market cap, which is the equity value of the firm. Compare that to current prices and you get over- or undervalued (or fairly valued). And, as you noted, the discount rate has a huge effect on the intrinsic value (which it does for any DCF model).

Where we differ is that when I calculate FCF and then discount the future FCF values, I'm equating that directly to market cap, the equity value of the firm. So, there's no addition of cash or subtraction of debt.

But, I probably should adjust this. FCFE (FCF-to-equity) is actually net income - (net capex + depreciation - average acquisitions) - (changes in working capital) + (net debt issued). That's what I've been using for Nam Tai (NTE) but not for the others. Using CFFO - capex is a shorthand for the above, but if it's equated to FCFE, it assumes a stable capital structure (very little net debt being issued or paid off and relatively small acquisitions, if any).

Anyway, the fact that you went from EV to market cap almost certainly explains the differences between our two models (assuming we both had similar FCF values calculated).

Cheers,
Jim
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