I believe Lockheed Martin ($LMT), at approximately $81/share is fairly valued on a cash flow valuation basis. Assuming all else at $LMT meets my standard for good business, I'd buy it today for the long term at $64.
Lockheed Martin is the world's largest defense contractor with 2009 sales of $45 billion. The firm operates in four reporting segments--aeronautics, electronic systems, space systems, and information and global services. Bethesda, Md.-based Lockheed employs 140,000 people.
I estimated the firm's WACC at 11.47% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Average Annual Growth: approx. 11%
CAGR: approx. 6%
Consensus Forecast Industry 5-Year Growth: approx. 13% per year
Consensus Forecast Company 5-Year Growth: approx. 8% per year
Assuming the company achieves a 5-year growth rate in FCF of 8% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
FCF $ Millions
The firm's future cash flows, discounted at a WACC of 11.47%, give a present value for the entire firm (Debt + Equity) of $34,346 million. If the firm's fair value of debt is estimated at $6512 million, then the fair value of the firm's equity could be $27,834 million. $27,834 million / 346 million outstanding shares is approximately $80 per share and a 20% margin of safety is $64. Assuming all else at $LMT meets my standard for good business, I'd buy it today for the long term at $64.