Liberty Energy Inc.'s (NYSE:LBRT) Discounted Cash Flow Analysis Explained

3 min read | January 06, 2025 08:50 AM PST | By Team Kalkine Media

Liberty Energy Inc.'s (NYSE:LBRT) Discounted Cash Flow Analysis Explained — Image source: Shutterstock

Understanding the DCF Model for Liberty Energy (NYSE:LBRT)

The Discounted Cash Flow model estimates the intrinsic value of Liberty Energy Inc. by projecting future cash flows and discounting them back to present value. This method considers two stages: the first assumes higher growth, while the second reflects a more stable growth phase. For the calculation, the free cash flow (FCF) projections over the next decade are critical in determining the company’s potential value.

Liberty Energy’s Discount Rate and Cash Flow Assumptions

The DCF analysis relies heavily on assumptions, particularly the discount rate and cash flow projections. For Liberty Energy, an 8.1% discount rate is applied, based on the company’s levered beta of 1.319, which measures the stock’s volatility in comparison to the broader market. These assumptions, alongside future free cash flow projections, play a significant role in determining Liberty Energy’s intrinsic value.

Valuation and Market Price Comparison

Using the DCF model, Liberty Energy’s intrinsic value is estimated at $4.4 billion. The total equity value is then divided by the number of shares outstanding, revealing that the company’s stock is currently undervalued by 23%. With a share price of $20.9, the model suggests that Liberty Energy’s stock is trading below its calculated intrinsic value. However, such calculations should be viewed as estimates, and market conditions can affect the outcome.

Limitations of the Discounted Cash Flow Model for Liberty Energy

While the Discounted Cash Flow (DCF) model offers valuable insights, it has its limitations. The model does not factor in the cyclicality of the energy sector, which can cause fluctuations in free cash flow. Additionally, it overlooks potential capital requirements that could affect Liberty Energy’s performance. As a result, while DCF provides a rough estimate of the company’s value, it does not account for all the variables that may influence the stock's performance.

Liberty Energy Inc. showed signs of being undervalued according to the DCF model, which estimates the company’s intrinsic value at $4.4 billion. While the stock appears to be trading below its intrinsic value, it is important to recognize the sensitivity of the DCF model to assumptions like cash flow and the discount rate. Though it provides useful insights, the model does not account for all external factors that could influence Liberty Energy’s financial performance.

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