Friday, March 16, 2012

L-3 Communications Holdings Inc: $LLL Cash Flow Valuation Update


Current Price: ~ $71/share
Projected Yield: ~ 2.83%



L-3 Communications is a leading provider of high-technology products, systems, and subsystems in the defense electronics business. Customers include the United States Department of Defense (75% of 2011 sales), other U.S. governmental agencies (7%), foreign governments (8%), and commercial customers (6% foreign and 4% domestic). Areas of focus include intelligence, aircraft modernization, training, communication systems, and specialized products such as bomb-detection equipment.           


Estimated WACC for the firm today is 9.05% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year
FCF $Millions
2002
256
2003
373
2004
540
2005
727
2006
918
2007
1113
2008
1169
2009
1221
2010
1280
2011
1292


Average Annual Growth FCF: ~ 21%
CAGR FCF: ~ 20%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year
Consensus Forecast Company 5-Year Growth: ~ 3% per year
Internal Growth Rate: ~ 5%
Sustainable Growth Rate: ~ 13%

Scenario 1
Average FCF (2011, 2010, 2009) is $1264 million
  • Start at $1264 million FCF
  • Assume a 5-year growth rate in FCF of 3% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
1264
1
1302
2
1341
3
1381
4
1423
5
1465
Terminal Value
16676



The firm's future cash flows, discounted at a WACC of 9.05%, give a present value for the entire firm (Debt + Equity) of $16156 million. If the firm's fair value of debt is estimated at $4125 million, then the fair value of the firm's equity could be $12031 million.  $12031 million / 99 million outstanding shares is approximately $122 per share and a 20% margin of safety is $98/share.


Scenario 2
All else being equal,
  • Discount the firm's future FCFs at 13.00%

Discounted Cash Flow Valuation

Year
FCF $Millions
0
1264
1
1302
2
1341
3
1381
4
1423
5
1465
Terminal Value
11610


  • Present Value of the entire firm (Debt + Equity): $11129 million
  • Value of Equity: $7004 million or $71/share
  • 20% margin of safety is $57/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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