Wednesday, March 9, 2011

L-3 Communications Holdings Inc: $LLL valuation update

L-3 Communications Holdings, Inc ($LLL) filed a 10K annual report for 2010 recently so here's an update to the cash flow valuation posted January 20.  This update incorporates the firm's year-end 2010 data.  I believe $LLL is undervalued at $81/share and fairly valued at $102/share on a cash flow valuation basis.    


L-3 Communications is a leading provider of high-technology products, systems, and subsystems in the defense electronics business. The company sells products to the United States Department of Defense (76% of 2009 sales) as well as other U.S. and foreign governmental agencies and commercial customers. Areas of focus include intelligence, aircraft modernization, simulation and training, communication systems, and specialized products such as bomb-detection equipment.

I estimated the firm's WACC today at 9.69% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
YearFCF $Millions
200080
2001125
2002256
2003373
2004540
2005727
2006918
20071113
20081169
20091221
20101280
Internal Growth Rate: approx 5%
Sustainable Growth Rate: approx 13%
Average Annual Growth FCF: approx 35%
CAGR FCF: approx. 32%
Consensus Forecast Industry 5-Year Growth: approx 18% per year
Consensus Forecast Company 5-Year Growth: approx 8% per year
Assuming the company achieves a 5-year growth rate in FCF of 3% 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
YearFCF $ Millions
01280
11318
21358
31399
41441
51484
Terminal Value15780

The firm's future cash flows, discounted at a WACC of 9.69%, give a present value for the entire firm (Debt + Equity) of $15,260 million. If the firm's fair value of debt is estimated at $4202 million, then the fair value of the firm's equity could be $11,058 million.  $11,058 million / 108 million outstanding shares is approximately $102 per share and a 20% margin of safety is $82/share.

Sources
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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