Wednesday, March 9, 2011

Raytheon Company: $RTN valuation update

Current Price: ~ $53/share


Raytheon Company ($RTN) filed a 10K annual report for 2010 recently so here's an update to the cash flow valuation posted January 19.  This update incorporates the firm's year-end 2010 data.  I believe $RTN is fairly valued at $56/share on a cash flow valuation basis.    


Raytheon is a major United States defense contractor with nearly $25 billion in annual sales that operates through six segments: integrated defense systems, intelligence and information, missile systems, network-centric systems, space and airborne systems, and technical services. Sales to the U.S. government account for more than 88% of the company's total sales. Waltham, Mass., based Raytheon employs 75,000 people.

I estimated the firm's WACC today at 9.46% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

YearFCF $Millions
2000529
2001-353
2002581
20031043
20041708
20052177
20062371
2007800
20081711
20092445
20101556

Average Annual Growth FCF ex-2001: approx 27%
CAGR FCF: approx. 11%
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
YearFCF $ Millions
01556
11680
21815
31960
42117
52286
Terminal Value26110

The firm's future cash flows, discounted at a WACC of 9.46%, give a present value for the entire firm (Debt + Equity) of $24,093 million. If the firm's fair value of debt is estimated at $3783 million, then the fair value of the firm's equity could be $20,310 million.  $20,310 million / 360 million outstanding shares is approximately $56 per share and a 20% margin of safety is $45/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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