Current Price: ~ $70/share
Projected Yield: ~ 2.69%
Projected Yield: ~ 2.69%
Falls Church, Va.-based General Dynamics manufactures ships, armored vehicles, defense-oriented information technology systems, and business jets. The firm gets around 72% of revenue from the Department of Defense and the rest from foreign sales and Gulfstream business jets. In 2010, the firm generated $32.4 billion in sales and $2.6 billion in earnings.
I estimated the firm's WACC today at 12.93% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and growth rates:
| Year | FCF $Millions |
| 2001 | 747 |
| 2002 | 861 |
| 2003 | 1499 |
| 2004 | 1536 |
| 2005 | 1777 |
| 2006 | 1794 |
| 2007 | 2451 |
| 2008 | 2620 |
| 2009 | 2455 |
| 2010 | 2616 |
| TTM | 2735 |
Average Annual Growth FCF: ~ 17%
CAGR FCF: ~ 15%
Consensus Forecast Industry 5-Year Growth: ~ 14% per yearConsensus Forecast Company 5-Year Growth: ~ 8% per year
Starting at $2616 million FCF, 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 | 2616 |
| 1 | 2825 |
| 2 | 3051 |
| 3 | 3295 |
| 4 | 3559 |
| 5 | 3844 |
| Terminal Value | 32105 |
The firm's future cash flows, discounted at a WACC of 12.93%, give a present value for the entire firm (Debt + Equity) of $28,942 million. If the firm's fair value of debt is estimated at $4200 million, then the fair value of the firm's equity could be $24,742 million. $24,742 million / 372 million outstanding shares is approximately $67 per share and a 20% margin of safety is $53/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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