Is Life Technologies Corp. (LIFE) Overvalued?

Growth Story

Life had a steep increase in operating income since 2008. However, the growth has slowed down since 2010 although it fares better than its competition.

Growth Projections

Based on analysts’ estimates, LIFE is expected to grow by 6%[3] this year. However, the fundamentals of estimating growth led us to conclude differently. In order to estimate the growth, we analyzed the following:

–How much it reinvested in 2012 : Reinvestment rate of 22%

–How well it reinvested by analyzing its return on capital(ROC): 6.7%

This provides us a growth rate of around 1.5%[4] for this year which is consistent with the percentage change in drop in operating income since 2010.

Are we paying too high or low for the future growth?

As a mature company, most of Life Technologies Corp. (NASDAQ:LIFE)’s growth comes from its existing assets than from its growth assets. LIFE has two options from its existing assets:

–It can pay out all its earnings to shareholders and lenders

–It can reinvest a portion to achieve growth

Let us assume that LIFE pursues a no-growth policy. This implies that earnings will remain the same in perpetuity and LIFE should keep returning its entire earnings as dividends to its shareholders. The value of those assets i.e. value of LIFE without growth would be then after tax EBIT/cost of capital, i.e. $4.9 billion[5].

The Enterprise Value is $14.87 billion[6].

Hence, the price we pay for growth would be EV – Value of assets in place = $9.97 billion that constitutes around 67% of the price paid for future growth.

Growth with reinvestment

Now let’s assume that LIFE reinvests at its current rate of 22% with an ROC of 6.7%[7]. The value of the company with growth can be obtained as after tax EBIT *(1- reinvestment)/ (cost of capital – growth rate).

Value of LIFE with growth = $4.6 billion

Value of growth = – $0.3 billion

The value of growth is negative which is obvious because Life Technologies Corp. (NASDAQ:LIFE)’s return on capital is 6.7% which is less than its cost of capital i.e. 8.6%[8].

Conclusion

In order to have a positive value for growth, Life Technologies Corp. (NASDAQ:LIFE) needs to earn excess returns, i.e. its return on capital should be higher than the cost of capital. Since this is not the case, I’m inclined to pass on the stock.

[1]

Saurabh Mishra has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Is Life Technologies Overvalued? originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.