Is Liberty Latin America an Insane Value?

Balan Nair, the CEO of telecommunications company Liberty Latin America (Nasdaq: LILAK), just used the word “insanity” to describe his company’s stock price.

Nair thinks the market is giving investors a gift.

For those unfamiliar, Liberty Latin America offers cable and mobile services to 20 different countries in Latin America and the Caribbean.

After digging into Liberty Latin America’s business, I see clearly what CEO Nair arguing.

The market is neither appreciating Liberty Latin America’s ability to generate free cash flow nor appreciating the fact that its free cash flow is projected to increase significantly over the next couple of years.

To be clear, free cash flow is excess cash left over from growth and operations. It can be used to reduce debt, pay dividends or repurchase shares, or it can be saved for future use.

Generating free cash flow is basically the entire point of doing business.

Liberty Latin America is guiding for free cash flow of $220 million for 2022.

With 240 million shares outstanding, that means Liberty Latin America will generate $0.92 per share in free cash flow this year.

That’s impressive for a stock trading at $6.15 (as I write).

But that’s just this year. Projected free cash flow for the next couple of years looks even better.

Liberty Latin America is currently digesting three separate acquisitions.

Combined, the company has indicated that there is $155 million worth in synergies that will be realized from those transactions over the next two years.

That means this company could see its yearly free cash flow jump from 2022’s projected $220 million to $375 million by 2024.

That would be $1.56 worth of free cash flow per share on a stock that’s currently trading at just $6.15…

In other words, a free cash flow yield of 25% ($1.56 / $6.15 = 25%).

The last time that I saw a free cash flow yield this high from a solid, well-run company was in October 2021, when I shined my light on Cenovus Energy (NYSE: CVE). Cenovus Energy has since widely outperformed the market.

Liberty Latin America’s CEO is clearly unhappy with where his stock trades, and you can bet he won’t just sit back and let the company suffer from this low valuation.

Instead, he will exploit the discounted valuation to create value for shareholders.

As long as the stock continues to trade cheaply, Liberty Latin America’s stated plan is to use all of its free cash flow to repurchase its own shares at bargain levels.

Over the past four quarters, Liberty Latin America’s repurchases have accelerated as the stock price has come down and the valuation has improved.

When used appropriately like this, an aggressive share repurchase plan is a powerful tool for creating shareholder value.

The longer Liberty Latin America’s share price stays down, the more value Nair and his board of directors can create.

Today, The Value Meter rates Liberty Latin America’s shares as “Slightly Undervalued.”

The only reason they aren’t rated “Extremely Undervalued” is because we still need to see the company execute on the synergies it expects to deliver over the next couple of years.

It has been a tough year in the financial markets, but there is value to be found. Liberty Latin America is proof of that.

Valuation Rating: Slightly Undervalued

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Good investing,

Jody