Current Price: ~ $47/share
Yield: ~ 2.57%
Harris sells communications products and services to government and commercial customers in more than 150 countries. With recent acquisitions in new end markets, Harris will report results in RF communications (38% of fiscal 2011 sales), government communications (29%), and integrated network solutions (33%). The U.S. government represented 72% of sales in fiscal 2011. Based in Melbourne, Fla., Harris has operations worldwide and employs about 17,000 people.
Estimated WACC for the firm today is 10.24% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year

FCF
$Millions

2003

80

2004

204

2005

226

2006

188

2007

310

2008

404

2009

545

2010

605

2011

508

2012

619

Average Annual Growth FCF: ~ 33%
CAGR FCF: ~ 25.5%
Consensus Forecast Industry 5Year Growth: ~ 15% per year
Consensus Forecast Company 5Year Growth: ~ 3% per year
Internal Growth Rate: ~ 2% (Dividends per share > Earnings per share in 2012)
Scenario 1
Average FCF (2012, 2011, 2010) is $577 million
Average FCF (2012, 2011, 2010) is $577 million
 Start at $577 million FCF
 Assume a 5year 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 free cash flows, discounted at a WACC of 10.24%, give a present value for the entire firm (Debt + Equity) of $6495 million. If the firm's fair value of debt is estimated at $2148 million, then the fair value of the firm's equity could be $4347 million. $4347 million / 112 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.
Year

FCF
$Millions

0

577

1

594

2

612

3

631

4

649

5

669

Terminal
Value

6727

The firm's future free cash flows, discounted at a WACC of 10.24%, give a present value for the entire firm (Debt + Equity) of $6495 million. If the firm's fair value of debt is estimated at $2148 million, then the fair value of the firm's equity could be $4347 million. $4347 million / 112 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.
Scenario 2
All else being equal,
All else being equal,
 Assume a 5year growth rate in FCF of 6% per year, then 2.25% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year

FCF
$Millions

0

577

1

612

2

648

3

687

4

728

5

772

Terminal
Value

10242

 Present Value of the entire firm (Debt + Equity): $8858 million
 Value of Equity: $6710 million or $60/share
 20% margin of safety is $48/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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