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
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
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.
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,
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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