Current Price: ~ $55/share
Projected Yield: ~ 3.63%
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 72,000 people.
Estimated WACC for the firm today is 7.54% 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
|
443
|
2003
|
1141
|
2004
|
1605
|
2005
|
2102
|
2006
|
2371
|
2007
|
800
|
2008
|
1637
|
2009
|
2378
|
2010
|
1556
|
2011
|
1670
|
Average Annual Growth FCF: ~ 33%
CAGR FCF: ~ 16%
Consensus Forecast Industry 5-Year Growth: ~ 12% per year
Consensus Forecast Company 5-Year Growth: ~ 9% per year
Internal Growth Rate: ~ 5%
Sustainable Growth Rate: ~ 16%
Scenario 1
- Start at $1670 million FCF
- Assume a 5-year growth rate in FCF of 9% 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 7.54%, give a present value for the entire firm (Debt + Equity) of $34532 million. If the firm's fair value of debt is estimated at $5136 million, then the fair value of the firm's equity could be $29396 million. $29396 million / 333 million outstanding shares is approximately $88 per share and a 20% margin of safety is $70/share.
Year
|
FCF
$Millions
|
0
|
1670
|
1
|
1820
|
2
|
1984
|
3
|
2163
|
4
|
2357
|
5
|
2570
|
Terminal
Value
|
37156
|
The firm's future cash flows, discounted at a WACC of 7.54%, give a present value for the entire firm (Debt + Equity) of $34532 million. If the firm's fair value of debt is estimated at $5136 million, then the fair value of the firm's equity could be $29396 million. $29396 million / 333 million outstanding shares is approximately $88 per share and a 20% margin of safety is $70/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 5% per year, then 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF
$Millions
|
0
|
1670
|
1
|
1754
|
2
|
1841
|
3
|
1933
|
4
|
2030
|
5
|
2131
|
Terminal
Value
|
29689
|
- Present Value of the entire firm (Debt + Equity): $28421 million
- Value of Equity: $23285 million or $70/share
- 20% margin of safety is $56/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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