Tuesday, June 17, 2014

Neustar Is A Compelling Long-Term Deep Value Play

Summary

Neustar shares have been battered by negative rumors and headlines.
A high-upside and low-downside creates a unique investment opportunity.
Neustar is a compelling long-term deep value play.
Neustar (NYSE:NSR) is a company that has been troubled by a barrage of rumors concerning its ability to retain its Number Portability and Administration Center (NPAC) contract, which represents around 50% of revenue. The stock price has fallen by nearly 50% in the past 6 months and short interest is at 31.40% as of May 30th, 2014 (Yahoo! Finance). Due to the unique situation of Neustar, I have attempted to calculate a fair market value for the price of Neustar shares. My results and conclusion are below.
Assuming a 2% growth rate, at a price of $24.35, this implies a WACC of 19.93%, and assuming industry averages, an equity required rate of return of 23.02%. For me, as an equity investor, this is more than an acceptable rate of return, considering current yields and market sentiment. Of course, this is assuming Neustar wins the contract and continues to service the NPAC.
Assuming a 2% growth rate, an industry average WACC, and the current price per shares of $24.35 implies FCFF of just $1.37/shares, which represents a loss of 67.87% of FCFF.
Let's assume an absolute worst case scenario of a loss of 75% of cash flow. This means forecasted FCFF of just $1.07 per share. If we assume a 2% growth rate, and an industry average WACC of 7.76%, we arrive at a price per shares of $18.95. This gives us a downside of ~20% and an upside of nearly 100% (assuming a contract win and continuing FCFF).
Keep in mind that with a minimal forecasted growth rate of 2% in perpetuity, these are all extremely conservative estimates, as Neustar's other sectors are still growing at around 10%. In this case, we can't apply a simple FCFF growth model, as the short-term growth rate is too high and it would be foolish to assume that the 10% growth rate continues in perpetuity. Let us perform a (grossly) simple calculation and assume all earnings figures are reduced by 50%. We can then apply the Information Services industry average multiples for EV/Sales of 4.05, EV/EBITDA of 14.48, EV/EBIT of 20.62, and Price/Book of 5.10 to calculate prices of $17.96, $26.93, $24.93, and $24.89, respectively. With an equal weight to each multiple, we get a price of $23.67. Thus on a relative basis, the entire price of losing the NPAC contract appears to have been priced into the stock.
Neustar is a great deep value play that has minimal downside and very large upside. On both a worse case scenario FCFF and an industry-relative basis, Neustar appears to be fairly - perhaps even slightly under-priced. Furthermore, in 2013, the company repurchased $285.3 mm in shares, representing 9% of shares outstanding. Cheap debt helps, but this shows unwavering commitment by management to the operations of the company. To take advantage of this situation, I would recommend purchasing call options, or even going long the stock if you have a long time horizon.
Of course, the market is unpredictable and the stock price could fall further in the short term. But with all of the rumors and headlines in the past couple of months, any potential bad news has already been priced in.
Please see my work below. All figures come from the Neustar investor relations website which can be found here: http://www.neustar.biz/about-us/investor-relations
Industry Averages - Information Services
Cost of equity: 8.73%
Pre-Tax cost of debt: 4.54%
WACC: 7.76%
Market debt/Capital: 16.06%
Tax Rate: 17.0%
Neustar FCFF 1Q2014
2014 annual FCFF = Adjusted NI + Interest (1-T)+ Depreciation - WCInc - FCInv
= 238,000+19,460.57+27,460-13,853-13,634=257,613.57
257,613.57/60.23mm shares = $4.28 FCFF
Disclosure: The author is long NSR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

23 comments:

  1. If you've ever experienced that annoying ringing sound for no reason at all, you're probably experiencing Tinnitus. Tokanki Tinnitus Protocol is just the thing you need for this. For review click here

    ReplyDelete
  2. If you want a good fat burning supplement then Premier Diet Keto is the one for you. Using ingredients like Garcinia Cambogia and Forskolin its both effective and free from side effects. For review click here

    ReplyDelete
  3. When it comes to weight loss. Only a few supplimants can get the job done without any side effects. The best one being Rapid Tone Diet. Watch a review here: Rapid Tone Diet.

    ReplyDelete
  4. When it comes to weight loss. Only a few suppliments can get the job done without any side effects. The best one being Rapid Tone Diet. Watch a review here: Rapid Tone Diet.

    ReplyDelete
  5. When it comes to weight loss. Only a few suppliments can get the job done without any side effects. The best one being Rapid Tone Diet. Watch a review here: Rapid Tone Diet.

    ReplyDelete
  6. Ever got headache from that annoying ringing sound going off in your head? That condition is known as Tinnitus. To get a solution of how to cure it, Tonaki Tinnitus is here for you. Guaranteed recovery! For reviews click here Tonaki Tinnitus.

    ReplyDelete
  7. Ever got headache from that annoying ringing sound going off in your head? That condition is known as Tinnitus. To get a solution of how to cure it, Tonaki Tinnitus is here for you. Guaranteed recovery! For reviews click here Tonaki Tinnitus.

    ReplyDelete
  8. Hello I want to tell everyone About my secret of weight loss. i was very out of shape 8 months ago. then i tried Keto Ultra Diet supplement and it worked like a charm. It actually helps your body achieve ketosis fast and helps to burn fat for energy. I recommend u all to try this. Here you can read its review as well.
    Click Here

    ReplyDelete
  9. Ultra omega burn is a dietary weight loss supplement that targets your corporal fat cells to open up and impart energy to your body. Click Here To Read This Exclusive Ultra Omega Burn Review!

    ReplyDelete
  10. Hi I need to enlighten everybody Regarding my secret of weight reduction. I was overweight 8 months back. by then I tried Keto Ultra Diet supplement and it brought about the ideal result. It really engages your body to accomplish ketosis Fast and burn up fat for energy. I recommend u all to try this. Here you can read its review as well.



    Keto Ultra Diet

    ReplyDelete
  11. keto diet plan WHERE to shop forKETO BURN XTREME? REVIEWS, aspect EFFECTS & COST!
    Keto Burn Xtreme Review: As habits modification, weight gain becomes quite common. It’s laborious for folks to require the time to remain in form, and unhealthy consumption habits create things worse!
    https://my.desktopnexus.com/nicholsirianni/

    ReplyDelete
  12. Forskolin Keto Cycle
    survey can enable you to get the total data about this item. Thoroughly understand the fixings symptoms and working systems and how you can get a Forskolin Keto Cycle free preliminary. About Forskolin Keto Cycle: Before we bounce into the working of this weight reduction item, there is one quality or highlight that you should think about. Forskolin Keto Cycle Work by inciting ketosis in our body. To shed pounds, you have to eat less and consume the effectively aggregated fat. Presently, what happens when with this weight reduction supplement is it can consume the fat and can stifle the hunger also. All with the assistance of normal fixings. Supported digestion helps in enhancing the productivity of http://www.usahealthguides.com/forskolin-keto-cycle/

    ReplyDelete
  13. Bio Tech Pro producer is dependable on the grounds that we are deficient with regards to more data about them. Also, you can't purchase the enhancement in neighborhood stores or shops since the main acquiring alternative is by means of the online free preliminary right now offered at the item's site. This shows you should keep a receptive outlook with regards to picking an appropriate enhancement and examine other conceivable options as that is the best way to make the correct require your desires and necessities. One must pick an

    ReplyDelete
  14. Keto Slim capacities is regularly the glucose put away in the body yet once ketosis begins this vitality source shifts from the glucose to the carbs that you have taken in. No the carbs as opposed to getting changed over into fats get used in giving vitality to the body. Additionally, the chemical that aids the generation of fats from carbs is likewise controlled and kept from working. Controls your hunger The primary explanation behind getting fat and putting on wei Keto Slim ght is the carbs that you continue expending once in a while in a http://drozdietblog.com/keto-slim/

    ReplyDelete
  15. UroGenx
    are added to keep the functioning of physical activities in the maximum range. Mechanism of Action As seen from the above discussion, UroGenx is free from all steroidal elements. Similarly, the working mechanism is also different from those drugs and medications. It will simply act on the endocrine system and metabolic system of the body. By improving the functioning of enzymes and enhancing their secretion it will boost up the overall functioning of the body. Recommended Dosage One will a day, in

    ReplyDelete
  16. Bio Tech Pro
    muscles rapidly and makes you more grounded and conditioned. It can likewise consume fat by enhancing your digestion You get a body that you will be pleased to have brought about enhancing your certainty level. It can expand your perseverance and you spend more hours in the exercise center. There are a few different advantages, which you can increase out of this item with its standard use. There are n
    http://newtimesnutrition.com/bio-tech-pro/

    ReplyDelete

  17. Praltrix
    joint parts. When does happens, you will think it is simpler to shift and move. By improving the fibrous development and flexibility, and improving the blood vessels circulation all over the individual body, you are able to advantage from increased flexibility which was previously not available. It improves the oiling existing in the joint so that it is very possible for you to shift around. Usually, inflammation and discomfort occur in the old age because the natural oiling which is usually existing in the joint begins to fade away. It is a natural formula which does not comprise any component which might become a cause of complication in well being. Because of this, it is a widely known formula for therapy which does not have any associated complication at all. We are sure that a secure formula like Praltrix Reviews was all you needed. 1 efficient aspect about this complement is that it does not only slow up the agony sensation which is presently occurring in your individual body but also stops such discomfort to happen in the upcoming. Pain comfort like this indicates that you can do whatever you want, play with your children or grandchildren and not worry about discomfort anymore. Side Effects? When a complement uses only natural elements, there is no scope for any side effects to occur. This implies that you can use this item every day for when you want to get rid of inflammation and discomfort. By improving the

    ReplyDelete
  18. Paltrox RX
    yet accessible in any retail location or shop. Additionally, the organization is putting forth a 15-days free preliminary to its new clients. The preliminary is thoroughly free however you need to pay for the delivery and dealing with. Snap the connection beneath to purchase Paltrox RX from the official site. Less enthusiasm for sex and a drop in intensity is no motivation to be embarrassed. The explanation behind this might expand pressure, a quick pace of life and different sorts of issues. In the event that the temperature in the room has dropped and you consider evolving it, consider aphrodisiacs. Utilized for a long time, they have a solid animating impact. They normally increment drive and help to appreciate sex once more. Assuming, be that as it may, we care just for a sentimental night, we should wager on regular aphrodisiacs. How abou

    ReplyDelete
  19. Biofluxe Keto just need to pay the dealing with and shipping charges. In the event that you like the program, you can find more. Installment is made through charge card so you need access to that for purchasing Biofluxe Keto. Biofluxe Keto SHARK TANK Biofluxe Keto Reviews: When it comes to dropping weight, we as a whole realize that it's anything but a viable occupation to do. That is the reason why a ton of people http://newtimesnutrition.com/biofluxe-keto/

    ReplyDelete