Harris Corporation: $HRS Cash Flow Valuation Update

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 5-Year Growth: ~ 15% per year

Consensus Forecast Company 5-Year 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

• Start at $577 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	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,

• Assume a 5-year 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

Morningstar.com

Yahoo! Finance

Harris.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.