Thursday, March 3, 2011

Lockheed Martin: $LMT valuation update

Lockheed Martin ($LMT) filed a 10K annual report for 2010 recently so here's an update to the cash flow valuation I posted February 15.  This update incorporates the firm's year-end 2010 data.  I believe $LMT is fairly valued at $85/share on a cash flow valuation basis.    

Lockheed Martin is the world's largest defense contractor with 2010 sales of $45.8 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 today at 11.42% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
YearFCF $Millions
20001516
20011206
20021626
20031122
20042155
20052329
20062890
20073301
20083495
20092321
20102727
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. 9% per year
Assuming the company achieves a 5-year growth rate in FCF of 9% 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
02727
12972
23240
33532
43849
54196
Terminal Value40041

The firm's future cash flows, discounted at a WACC of 11.42%, give a present value for the entire firm (Debt + Equity) of $36,087 million. If the firm's fair value of debt is estimated at $6200 million, then the fair value of the firm's equity could be $29,887 million.  $29,887million / 350 million outstanding shares is approximately $85 per share and a 20% margin of safety is $68/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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