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:
Year | FCF $Millions |
2000 | 1516 |
2001 | 1206 |
2002 | 1626 |
2003 | 1122 |
2004 | 2155 |
2005 | 2329 |
2006 | 2890 |
2007 | 3301 |
2008 | 3495 |
2009 | 2321 |
2010 | 2727 |
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
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
Year | FCF $ Millions |
0 | 2727 |
1 | 2945 |
2 | 3181 |
3 | 3435 |
4 | 3710 |
5 | 4007 |
Terminal Value | 37740 |
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.
Morningstar.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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