Dave, I must respectfully disagree with your analysis. LU has a very healthy gross margin (44.3%), and its cash flow is significantly higher than its earnings due to depreciation and amortization of goodwill. It's debt ratio was 44.2% (down from 55.4% in the previous quarter). LT debt was a little under $2B at the end of last quarter. In short, LU is a financially healthy company, and its lofty P/E has less to do with it's current bottom line than with general expectations of very rapid improvement due to the roll-out of new products, improvements in the product mix etc.
The relevant question is what is TLAB's cash flow worth to a potential acquirer, and how can it be calculated. I don't have the numbers at my fingertips, but here's how to proceed. Take the earnings and divide by 1-the tax rate. That gives the earnings before taxes. Add to that all non-cash charges such as depreciation and amortization. That represents the cash available to service debt. Spread this number for say 10 years applying a conservative 25% per annum growth rate. I'd guess off the top of my head that 1998 free cash flow would come in at about $500MM. So, as far as I can see, the real question is what would this cash flow be worth to a potential acquirer. (Remember, interest to service the debt is deductible). Then add to the mix the possibilities of synergies with the right acquirer and you have the basis for rational merger analysis.
I did this analysis about a month ago, but unfortunately I lost my notes! As I recall, I came up with a value of roughly $75 per share assuming no synergies.
Regards,
Paul |
